Bullish Signals for Canadian Stocks: Bank of America’s Canada Cycle Indicator Turns Positive
Bank of America’s Canada Cycle Indicator (CCI) has flipped to positive territory, heralding a bullish outlook for Canadian stocks, according to a note released by the investment bank on Wednesday. This marks the first positive reading for the CCI since March 2023, following eight consecutive months of improvement.
Why This Matters
Bank of America (BofA) highlights that the CCI’s rise comes at a time when other economic indicators are weakening, positioning Canada as an attractive investment alternative in today’s uncertain macroeconomic climate.
Historical Performance
Historically, when the CCI is positive, the TSX Composite Index (TSX) tends to outperform the S&P 500 Index (SPX) 60% of the time, delivering an average outperformance of 4.2 percentage points over a 12-month period. Recent trends already illustrate this potential, with the TSX outperforming the SPX by 3.3 percentage points since June.
Earnings and Valuations
Earnings season has also provided a tailwind for Canadian stocks. With approximately 90% of Q2 earnings reported for the TSX 60, earnings per share (EPS) have grown 12% year-over-year, beating consensus estimates by 3.5%. This marks the strongest EPS growth since Q3 2022 and surpasses the S&P 500's 10% growth for the first time since Q4 2022.
From a valuation perspective, the TSX trades at just 14.7 times forward price-to-earnings (P/E), lower than its historical average of 15.4 times. On a relative basis, the TSX is at its steepest discount to the S&P 500 in history, trading at just 0.7 times forward P/E compared to the S&P 500.
Commodities and Future Outlook
However, sustained outperformance will likely require higher commodity prices, which have been a significant drag on the CCI. Despite this, Bank of America’s indicator suggests that Canadian stocks may offer compelling opportunities for investors in the months ahead.
Breaking It Down: What This Means for You
Let's simplify this:
- Positive Indicator: The Canada Cycle Indicator (CCI) turning positive means that Canadian stocks are likely to perform well in the near future.
- Historical Trends: Historically, when the CCI is positive, Canadian stocks (TSX) outperform U.S. stocks (SPX) 60% of the time by about 4.2% over a year.
- Earnings Growth: Canadian companies are reporting strong earnings, with a 12% growth in EPS, which is better than the 10% growth seen in U.S. companies.
- Valuations: Canadian stocks are relatively cheaper, trading at a lower P/E ratio compared to U.S. stocks, making them an attractive buy.
- Commodities Impact: The performance of Canadian stocks is tied to commodity prices, so higher commodity prices would further boost stock performance.
How It Affects You
If you’re an investor, this data suggests that now could be a good time to consider adding Canadian stocks to your portfolio. The combination of positive indicators, strong earnings growth, and attractive valuations makes Canadian stocks a compelling investment opportunity in the current market environment.
By understanding these key points, even the most novice investor can grasp why Canadian stocks might be a smart investment move right now.