Canadian Stocks Beating US for a Second Year as Banks Surge

f3fsxrr712q}wgsy7(m]0rvu_media_dl_1.png Bloomberg

Article content

(Bloomberg) — Canada’s equity benchmark is positioned to outperform its US counterpart for a second year in a row — which would be its first back-to-back win in 15 years.

Article content

But accomplishing that feat depends on whether the S&P/TSX Composite Index, which is up 9.9% so far this year, can sustain its edge over the S&P 500 Index, which is up 9.6% after Tuesday’s rally. The problem is both gauges’ advance have been driven by a single industry. In the US, it’s chipmakers and in Canada it’s banks. 

Article content

Article content

Article content

Roughly 60% of the Toronto stock market’s gain this year stems from five bank stocks. Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce and Bank of Nova Scotia have collectively added nearly 1,997 points, helping to propel the equity benchmark 3,145 points higher.

Article content

Article content

“This has been a spectacular first half of the year for the Canadian financials,” said Colin Cieszynski, chief market strategist and portfolio manager at SIA Wealth Management. He said a commodities boom has been “underpinning the Canadian economy and that’s been good for the banks.”

Article content

Meanwhile, the five best-performing chipmaker stocks in the S&P 500, led by Micron Technology Inc., have contributed nearly 60% of the index’s advance so far this year. When additional chip stocks are taken into consideration, such as Qualcomm Inc. or Nvidia Corp., the S&P 500’s gain is more concentrated than its Toronto equivalent.

Article content

In Canada, the stock market is fueled by the economic cycle instead of the technology cycle, according to Philip Petursson, chief investment strategist at IG Wealth Management.

Article content

Article content

Data released Tuesday showed the Canadian economy grew at a faster-than-expected clip in April with a 0.5% expansion, alleviating recession fears after a contraction in the first quarter.

Article content

“If the economic cycle continues to hold, and we think the risk of recession is very, very low in Canada or elsewhere around the world, it’s positive. But when the economy turns, that’s when the banks are going to start to face some headwinds,” Petursson said.

Article content

To be sure, Petursson said the Canadian stock market’s climb this past year has been broader based than in the US, which has mostly been led by the AI craze. The concentration of gold miners in Canada have provided a lift, so have oil-producing stocks and tech darlings.

Article content

Petursson expects to see more of those sectors boosting the market more so than banks through the rest of the year. Canadian bank stocks are more expensive than they’ve been at any point since the global financial crisis, on a price-to-book-value basis, according to data compiled by Bloomberg.

Article content

“The market itself still has room to move forward, but the contributions will come from other areas,” he added.

Article content

(Updates moves in second and third paragraphs, and chart for market close.)

Article content