Investor optimism is “questionable,” says Desjardins Group chief economist Jimmy Jean, who has reservations about the stock market rebound at the start of the year.
“The idea is that investors anticipate increases in earnings from now on,” explains the economist in an interview on the sidelines of a web conference on his financial forecasts. It’s as if the setback we saw in 2022 is over when, in our opinion, the worst is still ahead of us. »
Analysts on average anticipate a 10% increase in the profits of large American companies listed on the S&P 500. However, the majority of economists anticipate, for their part, that the rise in interest rates will cause a recession in 2023. “On average , when you look at previous cycles since the 1950s, earnings contract by 19% on average during a recession,” says Jean.
Year-to-date, the S&P 500 in New York has rebounded nearly 7%. The S&P/TSX on the Toronto Stock Exchange advanced by more than 6% over the same period.
Investors hoping the recession will bring interest rates down quickly may also be disappointed, Jean believes. “The risks of interest rates being driven higher or staying high for longer, well, that’s not very good for stock market valuations. »
Mr. Jean is less pessimistic for the Toronto Stock Exchange, however, because Canadian stocks are “more affordable” than US stocks.
According to Yardeni, the S&P 500 is trading at nearly 18.2 times earnings forecasts for the next 12 months. In comparison, this multiple is 12.5 times for Canadian equities. For the MSCI World Index, the valuation is 15.5 times.
Mr. Jean points out, in an interview, that the price of oil is holding up, despite fears of a recession. The energy transition is also bringing strong demand for metals. This structural context “smiles” on the Canadian stock market, according to him.
If he judges that it is too early to claim victory for equities, the economist is more optimistic for bonds. “This year, if it is a year where there is a pause in rate hikes and possibly at the end of the year a drop in interest rates, well, the markets are taking that into account in advance. . »
The value of a bond is inversely correlated to interest rates. When rates fall, the value of bonds rises. “It won’t be huge in the sense that rates won’t go back to zero, but we still have a better performance than in 2022 if we are right that there will be a recession and risk aversion. »
The stock market rebound also “surprised” the National Bank’s chief economist, Stéfane Marion. “Although a recession can still be avoided, we remain cautious about increasing our proportion of equities after the recent stock market boom,” the economist said in a note on Monday.