Equity
% return in C$
Canada: MSCI Canada; U.S.: MSCI USA; International markets: MSCI EAFE; Emerging markets: MSCI Emerging Markets. Source: Morningstar Direct
Fixed income and currency
% return in C$
Canada investment grade: Canada investment grade: Bloomberg Barclays Canada Aggregate; Global investment grade: Bloomberg Barclays Global Aggregate; U.S. high yield: Bloomberg Barclays U.S. High Yield. Source: Morningstar Direct.
Earnings growth backing up equity valuations
Stocks continue to trend higher into record territory, but rebounds in corporate earnings and decreases in bond yields have eased concerns around equity valuations. While the S&P 500 Index has extended its rebound from pandemic lows by another 17% so far this year, valuations continued to edge lower. For example, stock prices can be evaluated relative to profits, a measure known as price-to-earnings (P/E) ratio. Entering the pandemic, the “E” in this ratio fell sharply with the global shutdown. Still, investors looked past the pandemic, largely thanks to vaccines and accommodative monetary and fiscal policy, driving equity prices to all-time records and leading to substantial P/E expansions.
However, forward-looking P/E ratios have continued to improve, despite higher prices, thanks to stellar earnings (nudging future guidance higher). Approximately 59% of companies in the S&P 500 Index have reported earnings (as of July 30), and 88% have beaten already-high earnings expectations and 88% have beaten revenue expectations. The aggregate year-over-year earnings growth rate stands at 85%, the highest level since Q4 2009. High growth rates might be misleading due to 2020’s lows, but the bull case is that valuations can revert lower to their historical averages, even with higher stock prices, if strong earnings continue. The bear case, however, is that stock prices are “priced to perfection,” and some good earnings seasons might not be indicative of the long term, leaving stocks vulnerable to corrections.
S&P 500 Index has been rising on stronger earnings
Source: Bloomberg, Data as of July 31, 2021.