Market Factors: Stock market too frothy to add risk

In this edition of Market Factors, we tackle a plausible argument that investor sentiment is overheated to the bullish side and the rally is overdone. It’s Outlook 2025 forecast season and Darcy Keith reviews the accuracy of prognostications last year (hint – not terrific). There’s more bad news as an expert opinion disproves the geological validity of cartoons. We also look ahead to data releases on the calendar this week.

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Equities

Wall of Worry too short, or maybe dead

Ritholtz Wealth Management director of institutional asset management Ben Carlson believes that the U.S. election resulted in the return of animal spirits in the market, and not the good kind. Mr. Carlson is concerned that the wall of worry is not only too short, but temporarily deceased, setting bullish investors up for disappointment.

Mr. Carlson highlighted a prediction by strategist Ed Yardeni that the S&P 500 will climb to 10,000 by the end of the decade from current levels near 6040. This would require gains of 11 per cent per year, which doesn’t sound preposterous at first glance. But the index has been climbing at a roughly 16 per cent per year for the past 15 years and rallies don’t usually last 20 years.

Investors are racing to put money in U.S. equities with a speed that suggests a general lack of caution. The middle of November saw the second biggest weekly inflow into U.S. equities since 2008, well over US$50-billion. A Wall Street Journal interview with a random 37-year old investor led to an unsettling quote that “the euphoria everybody’s feeling is warranted.”

I’m old enough to remember when euphoria was a danger sign for markets. I agree with Mr. Carlson’s sentiment here: “I … prefer a bull market that climbs a wall of worry. Once everybody is in the pool I get a little nervous.”

U.S. household equity is already at extremes, as I noted last month, and the situation appears to be getting worse.

Mr. Carlson admits that no one in the history of equities has been able to sustainably call market tops and denies trying to do that here. I take his point, however, that markets are looking frothy, and investors should review their portfolio to ensure that the weightings are not creeping towards higher, unwanted levels of aggregate risk.

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Forecasts

Pollsters are even worse at markets than politics

Reuters was out last week with its latest survey of what the TSX will do in 2025 – so what better timing to go back and see how all those forecasts fared for the year that’s just about to wrap up.

Seasoned market watchers won’t be surprised here: those forecasts were pretty woeful. The median prediction of nearly two dozen portfolio managers and strategists in a survey conducted in November 2023 was for the S&P/TSX Composite Index to reach 21,000 by the end of this year. Even a subsequent survey conducted this past February suggested the 2024 high water mark would only be 21,750.

What actually transpired? The Canadian benchmark far surpassed those forecasts, reaching a record high so far in 2024 of 25,706.50. Few saw those types of gains coming until 2025.

To their credit, the survey participants were directionally correct (though it’s rare for market strategists on the whole to project a down year ahead in markets. After all, their popularity with clients can depend on it.)

And many of those strategists did presciently call for a series of rate cuts by the Bank of Canada and highlighted dividend stocks as an area of the market that would benefit.

But if you need a reminder in this ‘Market Outlook’ season that forecasts should always be taken with a grain of salt, there you have it.

Last week’s poll by the way for 2025 suggests the S&P/TSX Composite Index will reach 26,550 in 2025, with the consensus being that investors have front-loaded much of the positives that have been circulating, such as further rate cuts. Put your bets in now how far from reality that will turn out to be.

-Darcy Keith, Globe Investor

Diversions

Diversions headline

Apparently the cartoons lied to us. The Gizmodo story, Is It Possible to Dig All the Way Through the Earth to the Other Side?, by geophysicist Andrew Gase, lists the many reasons how.

The essentials

Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.

Globe Investor highlights

Feeling bullish these days? Ian McGugan explains why investors would be wise to curb their enthusiasm – or as he puts it, beware the bezzle

To what extent can the markets serve as a check on the power of the president? Jeff Sommer of The New York Times tries to answer this important question

Rob Carrick details the Canadian brokers now offering fractional shares – and provides some thoughts on each of them. Meanwhile, Rob also has this quick guide for investors with maturing GICs and questions about what to do

Norman Rothery provides an update on his Perch portfolio of smaller cap stocks, which has easily beaten the TSX Composite over the last 25 years

Magna investors are ignoring Trump’s tariff talk. David Berman explains why they may be onto something

The IPO market is dead. Tom Bradley looks at what may resurrect it

What’s up next

Employment data is front and center this week in Canada as the net change in employment for November will be released Friday – economists expect a gain of 20,000 jobs. The unemployment rate will be reported the same day and 6.6 per cent is expected.

It’s also a big week for bank earnings. Bank of Nova Scotia kicks things off Tuesday and the consensus analyst forecast is for C$1.598 per share. Royal Bank (C$3.027) and National Bank (C$2.568) follow on Wednesday.

On Thursday, CIBC (C$1.788), TD Bank (C$1.833) and BMO (C$2.385) report.

The U.S. ISM Manufacturing survey results were out Monday and the contractionary (below 50) 48.4 reading was above the expected 47.5. ISM Services results will be released Wednesday (55.6 expected), along with a final durable goods report for October.

The U.S. jobs market for November will get a report card on Friday with the change in nonfarm payrolls released. Economists expect 200,000 new jobs. Average hourly earnings is also reported with a year-over-year change of 3.9 per cent forecast.

The one U.S. earnings report worth noting is actually a Canadian-ish company – Lululemon. where profits of US$2.710 per share is forecast.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)