Equity Outlook

We think we have moved into the later stages of the cycle, but there is still gas left in the bull market’s tank. Policy risks could spur ongoing volatility, but the positive fundamental backdrop of economic and earnings growth is still intact, which we believe will prevent the recent market correction from spiraling into a bear market.
Asset Class Returns chartSource: Factset, 3/31/2018. Canadian large-cap stocks represented by the S&P/TSX Composite. U.S. Large-cap stocks represented by the S&P 500 Index. Indexed are unmanaged and are not available for direct investment.

Volatility isn’t over – We expect uncertain (potentially protectionist) trade policies and the continual withdrawal of U.S. Fed stimulus to stoke ongoing swings in stock prices as we advance through this year. Since 1928, the average 10% correction lasted three months, indicating that even amid favourable economic conditions, pullbacks can be extended. But positively, over the past 20 years, stocks have averaged a 12% return in the twelve months following stock market corrections.1

More compelling value – The silver lining in this year’s pullback is that stocks are now trading at their most attractive level in more than two years. The TSX’s 21.1% gain and the S&P 500’s 38.3% total return from ‘15-’17 took valuations to well above-average levels. But the forward price-to-earnings (P/E) ratio is down to 14.4 for the TSX and 16.1 for the S&P 500, and with 2018 earnings growth projected to be the strongest in eight years, we view this as an opportunity to buy a healthy market at a more attractive value.

Perspective is important – Although stocks have now experienced corrections in 2015, 2016 and 2018, this is still below average, as historically the stock market has averaged one correction per year since 1900. This recent decline has simply returned stocks to their levels near the end of 2017. The market is still up over the past year and has gained 244% since this bull market began — a 14.6% annual return.2

Important Information:

Past performance of the markets is no guarantee of how they will perform in the future.

Equity investments involve risk, including the loss of principal.


1. Ned Davis Research. Stocks represented by the S&P 500.

2. Represented by an equal mix of the S&P 500 Index and the S&P/TSX Composite.

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