This edition starts with a detailed discussion of an extremely bullish outlook from Deutsche Bank’s chief global strategist and continues with an opposing outlook of slower growth and income stock outperformance. The diversion covers a musical phenomenon I’ve been watching on Youtube, and as always we look ahead to important data releases.
The Charging Bull sculpture in New York City's financial district.MAry Altaffer/The Associated Press
Equities
S&P 500 to 7000 by year end
Deutsche Bank chief global strategist Binky Chadha jacked up his 2025 year-end S&P 500 target from an already-bullish 6550 to 7000 even though there’s only 112 calendar days left in the year. Some of those are trading holidays, too. That implies gains of about 8 per cent over the next few months.
This bullishness defies record high valuations and a U.S. economy weak enough that imminent Federal Reserve rate cuts are expected. What gives?
In broad terms Mr. Chadha believes the U.S. market has re-entered a channel of strong annual price growth of roughly 22 per cent that has been in place for the past three years. The Liberation Day sell-off only temporarily kicked stocks out of the channel and, despite recent weak employment data and investor fears, most of the major economic indicators remain in expansionary territory.
The strategist is well aware of high valuation levels but believes profit growth expectations and payout ratios will keep them there. His conversations with executives indicate that the hit to business from tariffs will remain manageable even if the cost pressure increases. Roughly half the negative effects of new tariffs on core goods are already behind us, he estimates.
Fund positioning is arguably the biggest reason for Mr. Chadha’s bullishness. Discretionary global fund managers (as opposed to trend-following, algorithmically driven portfolios) have held neutral weights in stocks since July.
Mr. Chadha thinks these weightings will flip to overweight as Liberation Day fears abate, providing significant upward pressure on global equity indices. The fourth quarter also historically sees strong flows into equities, boosted by ongoing share buybacks.
The strategist also believes that if U.S. presidential policies like tariffs cause further significant downward pressure on equity markets, Donald Trump will relent and soften the blow. This forms a degree of downside protection for the S&P 500.
Mr. Chadha’s sector recommendations show a slight tilt towards cyclical sectors like financials and consumer stocks that he believes will benefit as fears regarding the U.S. economy fade. He recommends overweighting industrials for the same reason but does not like oil and gas. He is now neutral on materials and underweight defensive sectors such as consumer staples and health care.
Regionally, Mr. Chadha is overweight the U.S. as a leader in recovery and also overweight Europe where profit growth may finally be picking up. U.S. outperformance of European equities has reached the extremes where historically the trend reverses, and European equities have already started to regain ground. The strategist is also equal weight emerging markets and underweight Japan.
Rate cuts
Back to slow growth, strong market?
It’s entirely possible to argue we are headed back into an environment that’s awful for Main Street and great for investors. The most recent jobs data showed a clear slowdown in both Canadian and U.S. economic growth. Domestically, BMO senior economist Shelly Kaushik recently highlighted a sharp decline in manufacturing employment. This is ominous as the manufacturing sectors are more sensitive to changes in the economic cycle, even in services-oriented, developed economies.
Central banks planetwide are set to slash borrowing costs to stimulate growth. BofA Securities Latin America and Canada economist Carlos Capistran expects 125 basis points, 75 basis points and 125 basis points of easing for the U.S., Canada and Mexico, respectively, before the end of 2026.
Scotiabank director of portfolio and quantitative strategy Hugo Ste-Marie is also in the rates going down camp. In a Monday research report, he noted that markets have priced in almost two full 25 basis point rate cuts in the next 12 months in Canada. In the U.S., Mr. Ste-Marie estimates that 140 basis points of rate cuts are already priced in.
The easing bias goes well beyond North America, according to Scotiabank. Mr. Ste-Marie wrote, “Our Global Monetary Policy index, which tracks monetary policy changes for 18 banks over a rolling six-month period, remains well anchored in ‘synchronized easing’ territory. As of today, a net 56 per cent of central banks we track have eased monetary policy in the last six months.”
It’s no secret what outperforms in slow growth, falling rate environments: dependable dividend paying stocks in sectors like utilities and pipelines, and stocks representing companies that grow no matter what the economic backdrop. Technology stocks are most often mentioned in the latter category.
Diversions
Riveting Ren
I’m not sure what this Ren kid is up to. He can play guitar and piano and is clearly talented. He can sing but often chooses not to in favour of hip hop cadences. His performances are more like performance art which is ironic because he can’t tour due to health problems.
His health problems are what make the back story fascinating. At 17 he was stricken with Lyme Disease that was misdiagnosed as various psychiatric disorders for a decade. He busked for money, endured psychosis, and developed a friend group that lost members in heartbreaking ways.
I’m honestly not sure if I completely like the music but I know I’m riveted at times.
The essentials
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Globe Investor highlights
National Bank has made some changes to its ‘Dividend All-Stars’ portfolio, including adding BCE
The Contra Guys make the argument that Laurentian Bank is ripe for a takeover
Sam Sivarajan revisits the key emotional traps investors are likely falling into and the steps they can take to course correct
Jamie McGeever wonders, if the Fed does the expected and cuts rates this month, does it mean that the central bank’s 2-per-cent inflation target has become 3 per cent?
What’s up next
The domestic data release calendar is light this week but there are some key releases. CPI for August is out next Tuesday, but there are no economist estimates available at this time. The Bank of Canada announces its decision on interest rates next Wednesday – credit markets imply an 82 per cent chance of a rate cut, according to Bloomberg.
There are no major corporate earnings this week.
South of the border the Americans have CPI for August on the 11th and economists forecast a 0.3 per cent month-over-month result for both top line and ex-food and energy. Advance retail sales for August are also expected to come in at 0.3 per cent. Industrial production for August is out next Tuesday and most economists expect a flat month-over-month result.
Important earnings results include Adobe Inc. ($5.179) next Tuesday and General Mills ($0.815).
See our full earnings and economic calendar here