While most investors probably look to the major U.S. exchanges for the biggest annual gains, the TSX could still outpace U.S. stocks in 2024. However, that wasn’t what most analysts were expecting. After all, the S&P 500 rallied an impressive 22% in 2023 compared to the 5.8% growth on the TSX.
That was then. It’s been a different story so far in 2024. As of this writing, the S&P 500 is up 5.2% year-to-date while the TSX has rallied 4.1%. Back in February, analysts said the TSX would rise slightly in 2024 before hitting record highs next year, juiced by the start of interest rate cuts.
Portfolio managers and strategies said they expected the TSX to rally 2.5% to 21,750 by the end of 2024. That’s a bullish move from November 2023, when the same analysts predicted the S&P 500 would hit 21,000 by the end of 2024. In early April, the TSX hit a new record high of 22,380.16.
The outlook for the TSX remains robust for 2024 and 2025 while guidance for the S&P 500, which hit a record high of 5264.85 on March 28, is less rosy. Wall Street analysts believe the S&P is headed higher, but a growing number see a stock market correction on the horizon.
Are U.S. Stocks Overvalued?
There is merit to those concerns. The U.S. economy expanded just 1.6% in the first quarter, well below the 2.4% estimate. Inflation remains stubbornly high, though, at 3.5%, compared to 2.9% in Canada. That might be too hot for the Federal Reserve to start cutting interest rates this year. The Bank of Canada is expected to cut interest rates by as much as 1% this year.
Outside of economic concerns, U.S. stocks are wildly overvalued.
The Forward 12-month Price-to-Earnings (P/E) Ratio for S&P 500 companies is at 20.08. That means that for every dollar of future earnings, investors are happy to pay $20.87. The ratio is above its five-year average of 19.1 and 10-year average of 17.8.
The CAPE Shiller Ratio stands at 33.31, more than double the long-term average of 16. Stocks weren’t this overvalued in 1929.
And lastly, there’s the total market capitalization to gross domestic product (GDP) ratio. This ratio looks at the size of the stock market relative to the size of the economy. A reading of 100% suggests that U.S. stocks are fairly valued. If it’s over 115%, the stock market is extremely overvalued. The market-cap-to-GDP ratio is currently at 178.
Any way you look at it, U.S. stocks are overvalued, with the S&P 500 trading at roughly 24 times earnings. The TSX, meanwhile, is trading at 18 times earnings.
Another thing to remember is that the S&P 500 is weighted by market cap. Larger companies have a bigger impact on the overall value of the S&P 500. Right now, the S&P 500 is dominated by the Magnificent Seven tech stocks: Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla.
Together, these seven stocks account for almost 30% of the value of the entire index. If any of the Magnificent Seven stocks report a bad quarter, it could drag the entire index down. If they all report underwhelming quarterly financial results, the S&P 500 could easily experience a stock market correction.
How Will Canadian Stocks Perform?
By contrast, the TSX is weighted toward the kind of stocks that actually benefit from interest rate cuts. On top of that, the International Monetary Fund expects the Canadian economy to expand by 2.3% in 2025 compared to 1.9% for the U.S. and 1.7% for all advanced economies.
Admittedly, the bigger gains are mostly because the Canadian economy has done so poorly and is expected to begin rebounding. The U.S. economy, meanwhile, has been on fire.
With the Canadian economy improving and interest rates coming down, currently undervalued sectors including banking, telecom, energy, and real estate investment trusts (REITs) are expected to perform well.
Learn-To-Trade.com, Canada’s Leader in Stock Market Trading Courses
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