2016 Market Outlook
by Ryan Lewenza, Private Client Strategist, Raymond James Canada
Highlights from the report
â˘Â Economists see the global economy picking up modestly in 2016 with expectations of 3.4% global GDP growth, up from 3% in 2015. While we also see the global economy improving, and see little signs of a US/global recession, the downside risks to the economy and our outlook are considerable, making this year one of the more challenging years to forecast in our careers.
â˘Â For the US economy weâre expecting similar growth to 2015, with our US Economist forecasting GDP growth of 2.3%. We see consumer spending continuing to be the main driver of economic growth. We see the Canadian economy recovering but with economic growth remaining below-trend, and trailing the US economy once again in 2016.
â˘Â Corporate earnings disappointed last year as the strong US dollar and oil prices weighed on US earnings, while weak commodity prices weighed on Canadian profits. However, we expect some of the headwinds for earnings to fade, and as such, are forecasting a return to positive earnings growth in 2016. We forecast S&P 500 Index (S&P 500) 2016 earnings of US$123.96/share, which equates to 5.9% Y/Y growth. Multiplying our US$123.96/share earnings estimate by our projected 17.5x P/E multiple, we derive a year-end price target of 2,170, which if realized would equate to an 8% total return.
â˘Â Our S&P/TSX Composite Index (S&P/TSX) 2016 price target is 14,220, which if realized would equate to a 12% total return. Based on our target prices, we are projecting higher returns from the S&P/TSX in 2016; however, this does not take into consideration the US dollar, which we see further gains in. Like last year, we see a stronger US dollar contributing to Canadian returns on US assets, and therefore continue to prefer US to Canadian equities.
â˘Â There are always risks to market forecasting and investing, but this year we find the potential risks to our outlook particularly elevated. Our base case view is that equity markets will be able to work through these issues, but in the event that one of these risks intensifies, we must be prepared to shift to the evolving market conditions.
â˘Â We are maintaining our selective cyclical bias with an overweight in the information technology and industrials sectors. We also recently upgraded telecom to overweight. We are downgrading consumer discretionary to market weight in line with the financials, consumer staples, health care and energy sectors. Materials and utilities sectors remain at underweight.
â˘Â For additional insights for 2016, we will be hosting our 2016 Market Outlook conference call on Monday January 11, 2016 at 1PM Eastern Time. More details to follow.
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