TSX expected to match US performance as chief investment strategist says catch-up trade has likely run its course
BMO Capital Markets’ chief investment strategist, Brian Belski, no longer sees the S&P/TSX Composite Index positioned to outperform Wall Street stocks, reversing the stance he held over the past 12 months, as reported by The Globe and Mail.
In May 2024, Belski had argued that the Canadian benchmark’s relative value to the S&P 500, along with expected catalysts and contrarian indicators, would drive TSX outperformance.
That outlook materialised, with the TSX returning more than 15 percent over the past year, surpassing the S&P 500’s 10 percent gain.
These returns exclude the TSX’s higher dividend payouts relative to the US index.
In a Thursday morning note, BMO’s Brian Belski said, “We believe Canadian stocks are now more likely to perform in line with their neighbour to the south over the next 12 months.”
He added that while Canada still offers “strong relative value, downside protection,” and stands to benefit from broader equity performance, much of the “catch-up” trade he anticipated last year has likely already played out.
Belski clarified that he is not advising investors to underweight Canadian equities.
He said the shift reflects “the sharp outperformance of the TSX as relative valuations have started to normalize, growth profiles have converged, and foreign flows have rebounded from deeply depressed levels.”
Belski added that with most of those tailwinds likely behind Canada, it will be difficult for the market to show the same level of outperformance over the next year.
He reiterated his long-held view that the US remains in a 25-year secular bull market and stated that Canadian stocks, which largely track US market trends, should continue to perform well.
Still, Belski now expects the US to “return to its role as the primary fundamental driver of growth and ultimately re-take the leadership mantle as trade noise and risks subside.”
He noted that the spread between TSX and S&P 500 valuations—measured through metrics like price to earnings and price to book—has narrowed significantly over the past year.
According to BMO’s calculations, the spread has moved from nearly two standard deviations to under one.
Belski said he expects Canada to continue trading at a discount relative to the US.
He also pointed out that Canadian earnings growth trends have normalised to match the S&P 500 and that foreign investment flows have sharply rebounded, removing their previous role as a contrarian signal.
