Quarterly Canadian equity outlook : How could Canadian equities perform during the remainder of the year?

It's important to note that strong equity performance in the first half of the year was not universal. Instead, it came primarily from large technology companies, such as Apple and Microsoft, as noted in our quarterly Perspectives report Opens in a new window..

The sector-specific nature of the rally shows up in index performance. During the first half of this year, we saw a rise of 38.75% in the tech-focused Nasdaq 100 Index Opens in a new window.. Conversely, the Dow Jones Industrial Average and S&P/TSX Composite Index, which have a broader scope and are less exposed to technology companies, gained only 3.80% and 3.97% respectively. The performance of the S&P 500 so far this year sits between these extremes.

The strong performance of technology stocks so far this year was also not based entirely on earnings growth. Instead, it came largely from multiple expansions, as investors bought these equities at low valuation multiples and then sold them at higher ones. Technology companies are considered growth stocks. This increases the likelihood of their appreciation due to multiple expansion over time.

We also noticed a significant break in the relationship between technology stocks and interest rates this year. In the three years prior to 2023, technology stocks showed an inverse correlation with interest rates, outperforming when rates were declining and underperforming when rates were rising. That correlation has ceased.

From January 4, 2022, to October 12, 2022, the correction in global equities was relatively shallow compared to other historical corrections at 23% in local currency terms, as gauged by the MSCI World Index (PDF, 180 KB) Opens in a new window.. This correction stemmed mostly from overvaluation and rising interest rates, with higher inflation, economic volatility and geopolitical tensions contributing. Even if these factors were fully priced in — which is debatable — it's difficult to argue that a recession has been fully accounted for in pricing.

We can interpret the narrowness of the equity market rally as negative or positive. On the negative side, we could argue that a narrow band of successful stocks shows the market isn't as resilient as it might at first appear.

From a positive perspective, while specific segments of the global equity market may be stretched, such as U.S., European and technology stocks, this isn't necessarily the case for the overall market. Regardless of the interpretation, equities are considered a risky asset class, as their value can fluctuate more than bonds. Both the upside and downside must be evaluated. As of now, the potential upside is insufficient to compensate for the downside risk.

Continue reading the full Perspectives report.

If you’d like to discuss equity investment opportunities or have questions about your investment portfolio, please reach out to your advisor or CIBC representative any time.