Markets remain close to all-time highs despite warnings about valuations, geopolitical tensions and a potential AI bubble.guirong hao/iStockPhoto / Getty Images
Investors are cheering the latest rally in stocks, especially after the rout on Friday, yet many remain nervous about how long this bull market will last.
Following a steep selloff on Friday after U.S. President Donald Trump issued more tariff threats against China (which he then walked back on the weekend), the S&P/TSX Composite Index closed up 1.7 per cent on Tuesday, its first trading day after the Thanksgiving holiday. The Canadian index is up 24 per cent over the past year – not far from its record 30,686.96 reached on Oct. 6.
The S&P 500, which also recovered this week after Friday’s plunge, is up 13 per cent over the past year, just shy of its record 6,764.15 on Oct. 9.
Some market strategists argue the bull market is still in its early innings, to use the timely baseball analogy. Others say it’s late in the game, but there are more hits to come. More bearish strategists believe the market is in extra innings and it’s time to find the exits, at least on some equities.
A ‘giant bull market’
Brian Belski, BMO Capital Markets’ chief investment strategist, believes the U.S. and Canada are in a “big, giant bull market” and that investors have been too cautious.
“Investors, in general, have been way too negative, way too macro-focused. All the macro worries that kept people out of stocks in Canada didn’t come to fruition,” Mr. Belski says.
He points to lower inflation, steady employment and strong corporate earnings as support for stock market growth.
“Stocks lead earnings, which leads the economy,” Mr. Belski says. “The stock market already told you earnings are going to be good, but nobody believed it.”
Mr. Belski believes North American markets are in the third inning of the current cyclical bull market – which he says began in October, 2022 in the U.S. – and in the fifth or sixth inning of a 25-year secular bull market he says started in 2009 in the U.S.
“Canada will come along for the ride from time to time, like now,” he says.
In both Canada and the U.S., his firm is overweight in stocks from sectors such as financials, technology, and consumer discretionary.
“What’s happened this year is going to usher in Goldilocks for both the U.S. and Canada next year,” he says. “If you’re calling for a correction, good luck with that, because nobody can time the market.”
More runs to come
Lesley Marks, chief investment officer, equities, at Mackenzie Investments, says many analysts and investors decreased their corporate earnings expectations this year after “Liberation Day” on April 2, when Mr. Trump announced sweeping retaliatory tariffs on several countries.
“The thinking was that higher tariffs would result in either higher costs or lower demand, and so earnings would have to fall,” she says.
Instead, earnings have been stronger than expected, especially after some tariffs weren’t as punishing as originally presented. That led to higher valuations and investor optimism, she says. The expectation that interest rates will continue to drop has also been a catalyst for markets.
Ms. Marks believes we’re in the “second half” of the baseball game.
“I don’t think this bull market will die on valuation alone. There will have to be a catalyst,” she says, such as a change in the outlook for interest rates driven by higher inflation or a major economic slowdown in the U.S.
“If the U.S. goes into a recession, obviously, that would put an end to the baseball game. Having said that, to carry the analogy further, you can still have innings with a lot of runs, even in the later stages of the game. So, we don’t want to be too negative here around the outlook for equities, just because they’ve had a very strong three-year run.”
Into extra innings
David Rosenberg, founder of independent research firm Rosenberg Research and Associates Inc., is more bearish on equity markets, believing the bull market is in “extra innings.”
Mr. Rosenberg believes the market is in a bubble that began in June, 2024. And, pointing to historical data showing bubbles last an average of 18 months, “I would suggest the clock is ticking.”
He says a handful of market valuations are “in the stratosphere” but focuses mostly on the CAPE ratio, also known as the Shiller P/E ratio, a stock valuation applied to the S&P 500. He notes the ratio is approaching 40, a level it hasn’t reached since the tail end of the dot-com bubble in 1999-2000.
“This is the valuation cloud over the stock market,” he says. “It’s not uncommon for pundits to say valuations only matter when they matter, or valuations are not a timing tool. Both statements are correct. However, valuations at this level most certainly are a constraint on future expected potential returns.”
He recommends investors reduce risk in their portfolios by shifting some assets into more defensive sectors such as utilities, health care and consumer staples.
“Outside of that, start building a liquidity buffer and make sure you have bonds and gold as a diversification ballast in the portfolio,” he says.
A cautionary signal for markets
Just because the market is up a lot doesn’t mean it can’t keep rising, wrote Craig Basinger, chief market strategist at Purpose Investments Inc. in Toronto, in a note on Tuesday, “but we believe we’re in somewhat uncharted territory.”
While there are positive macroeconomic indicators, such as stable inflation and improving economic data and earnings, he points to the University of Michigan’s closely watched consumer sentiment survey, which showed consumers’ five-year outlooks for their household finances fell to the lowest in more than a decade in October (although overall consumer sentiment remained basically unchanged from the previous month).
“There was a time when strong equity markets made people celebrate, but that doesn’t seem to be the norm anymore,” he wrote. “Rising markets just don’t make people as happy as they used to. This is a cautionary signal for markets.”