TD Wealth's Ryan Lewenza, VP, and North American Equity Analyst, shares his outlook for equities in 2014.
2014 Equity Market Outlook
Highlights
• We see global growth accelerating in 2014, providing the foundation for improved earnings growth and additional equity gains next year. While strong equity returns in 2013 have been driven by an expansion of valuation multiples, we believe the key factor to market performance in 2014 will be earnings growth.
• We estimate 2014 earnings to grow 7% to US$115.50 for the S&P 500 Index (S&P 500). Applying a 17x P/E target multiple to our US$115.50 estimate equates to a 2014 year-end price target of 1,960. Adding in a 2% dividend yield, we forecast a potential 10.5% total return for 2014.
• We forecast S&P/TSX earnings to rise 6% next year to $875, but are well below the consensus estimate of $956. Combining our $875 earnings estimate with a projected 16.3x P/E, we arrive at a 2014 year-end price target of 14,250 for the S&P/TSX. Adding in an estimated 3% dividend yield, we estimate a total return of 9% in 2014.
• The technical profile for the S&P 500 remains bullish longer term, but we see the potential for weakness in Q1/14, as the U.S. Federal Reserve (Fed) could begin to taper its asset purchases. The S&P/TSX has improved of late, but we expect it will underperform the S&P 500 again in 2014.
• We recommend a cyclical bias in equity portfolios based on expectations for improving economic growth. This includes an overweight in the industrials, financials, and information technology sectors.
• Among the defensive sectors we recommend an overweight in the U.S. health care sector, as it is well positioned for U.S. demographic trends and Obamacare. Given our expectations for interest rates to rise next year, we recommend an underweight in the interest-sensitive utilities and telecommunications sectors, along with the REIT industry. We remain underweight the materials sector, as the outlook for commodity prices remains lackluster, with China’s GDP growth likely to moderate to around 7% in the coming years.
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