The U.S. economy and Canadian economy are heading in opposite directions. The same can be said for the U.S. and Europe as well. That massive divergence is also seen in stock market performance. I’ve long suggested that the U.S. is home to most of the best companies on earth. Canadian investors should hold ample U.S. stocks (or the market ETFs). We need to control our urge for those juicy Canadian dividends that can exaggerate our home bias. U.S. stocks lifted portfolios in 2023. Will we get a repeat? Will U.S. stocks save 2024?
Of course, investors should consider a global portfolio that also includes non North American developed and emerging markets. I have a bias to Canadian and U.S. multinationals. That bias has worked out quite well for 15 years more. I do have some very modest global exposure by way of thematic ETF plays in semiconductors and uranium and the electric vehicle sector.
Many suggest that for U.S. stocks to continue to do the heavy lifting, earnings growth has to take over from multiple expansion (paying more for current earnings). This post will look at those growth prospects.
Is the soft news priced in?
The following 8 paragraphs are from David Berman in the Globe & Mail.
The bad news is that analysts are growing increasingly downbeat in the near-term. The consensus now expects that companies within the S&P 500 will report fourth-quarter earnings growth of 1.8 per cent, year-over-year, according to Hugo Ste-Marie, an analyst at Bank of Nova Scotia.
The change from the third quarter looks even worse, after a series of downward revisions from managers over the past few months: Earnings are expected to decline 7.9 per cent from the previous quarter, with few bright spots in the landscape.
“While poor corporate guidance is to blame, the magnitude of the adjustments suggest macro conditions also played a role,” Mr. Ste-Marie said in a note this week.
Technology is the only sector within the blue-chip index expected to report rising profits.
A pleasant surprise?
Ohsung Kwon and Savita Subramanian, equity and quant strategists at Bank of America, believe that a conservative outlook for profits is already baked in to share prices, offering potential for pleasant surprises if companies beat low-ball expectations.
The strategists expect that fourth-quarter profits will rise 6 per cent, year-over-year, continuing an earnings recovery that began in the third quarter. As 2024 gains steam, they expect a bullish year ahead for stocks.
“Our analyst survey into 2024 painted a goldilocks scenario for stocks,” Ms. Subramanian and Mr. Kwon said in a note.
This scenario includes higher margins, efficiency gains and easing cost pressures. Their sense ahead of the fourth-quarter reporting season is that this goldilocks scenario is “well intact.”
Morgan Stanley has some optimistic earnings estimates, but they are less than consensus.
That would be good news if we get that earnings growth. Of course we should keep in mind that analysts completely misread 2023. They were thinking horror show and we got Goldilocks.
Check out the 2023 investment year review. And as always, stick to your investment plan.
Is the Magnificent 7 expensive?
Also in the Globe, Ian McGugan points to a study that suggests that the Magnificent 7 stocks might be reasonably priced when you consider the growth potential – the PEG ratio. The Magnificent 7 are Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla Inc. – this group has grown in market capitalization by US$4.7-trillion this year alone.
From that post …
Investors typically regard a cheap stock as one with a PEG ratio around 1. By that standard, many of the Magnificent Seven look to be reasonably priced.
Amazon (a PEG of 1.3), Alphabet (1.3), Meta (1.2) are on the borderline of cheap, while Nvidia (0.7) looks to be a downright bargain, according to calculations this week by Robert Armstrong of the Financial Times.
Microsoft (2.6) and Tesla (2.1) are somewhat pricey by PEG’s reckoning but not outrageous. Only Apple (4.6) looks like a true luxury item, perhaps because it’s perceived as a superbly managed, ultrasafe defensive stock.
The analyst suggests boring market-like returns for the group over the next decade. Perhaps it won’t be another lost decade for U.S. stocks.
And on the tech front this is shocking. Growth might be scarce in the future and concentrated in one country.
More Sunday Reads
On the theme of U.S. stocks, Mark at My Own Advisor asks if tech and oil is the new barbell strategy. After all Warren Buffett is heavily weighted to tech with Berkshire’s Apple position, and he’s been building his energy portfolio by way of Occidental (OXY). Berkshire also has an energy division.
That said, Mr. Buffett plays a lot of defense, as I do. I like a lot of the stuff in the middle – the defensive sectors for retirement. We also hold some nice tech and energy exposure. And like Buffett, I have an overweighted position in Apple. My wife’s largest stock position is Berkshire.
I am currently writing an article for Seeking Alpha, looking at our U.S. stock portfolio. Here’s a key chart from that post.
We have a nice beat, but certainly lagged the market in 2023, as did most. Stay tuned for that post. I will also cover that portfolio on Cut The Crap Investing.
On Findependence Hub, do you need $2 million to retire? As always, that depends. It depends on your lifestyle and debt, pensions and more. I see many retiring quite comfortably on very modest portfolios with CPP and OAS.
While we certainly look to the U.S. and Europe for healthcare behemoths, Dan at stocktrades.ca offers 3 Canadian healthcare stocks to consider. I’d suggest that healthcare is the top sector for retirees. It’s a nice combination of growth and defense, with (ironically) demographic tailwinds. Then consumer staples and utilities / pipelines.
It’s earnings season
Dividend Hawk will be busy as earnings season kicks into gear. Here is Hawk’s take on week 1. We both enjoyed our Pepsi dividends this past week as well. I’ll drink to that. And that is one of my favourite defensive consumer stocks. I also added some more fizz (shares) to the portfolio a few weeks ago.
Banker on Wheels asks if ‘hold your age in bonds’ is a good idea. Answer: Nooooooooo!!!!!! That’s a terrible idea. If you think that is a good idea feel free to reach out. I’m happy to chat 🙂
Sometimes a chart says it all …
Also included in the mix – stock returns demystified. It’s two interesting charts, that’s it.
Mike the Dividend Guy offers 3 of his favourite Canadian stocks (podcast).
Last week I updated the returns for the Beat The TSX Portfolio. Next week I will update the returns for the core ETF portfolios, the Canadian Wide Moat Portfolios and all-in-one asset allocation ETFs. Here’s a taste of the core ETF portfolios for 2023. We start with a hypothetical $10,000 on portfoliovisualizer.com. CAGR is the annual return, Stdev is a measurement of the risk level.
It was a very good year for passive core investing. Once again we see that those who take on greater risk are rewarded with greater returns.
Gen Y Money offered her 2023 portfolio report.
And the spot bitcoin price ETFs were finally approved in the U.S. It certainly was a ‘buy the rumour and sell the news’ event. I suggested as much in this private comment with some investor-friends on Twitter / X, on December 5th.
That said, I do think bitcoin is on its way to becoming an accepted portfolio asset. Its use is not advice of course. To each his or her own. I see bitcoin as digital gold. I continue to add on a regular basis. Bitcoin was the top performing asset in 2023 and had a wonderful run up to the ETF news.
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