What’s behind TSX and S&P 500 gains

The TSX wrapped up last week 0.6% higher, closing on Friday at 15,953.51.

Read: Advisors bullish on Canadian equities

That’s a new all-time high, notes Prab Sagoo, associate director at Nasdaq Advisory Services, in his weekly market analysis. Further, the index recorded a seventh consecutive weekly gain.

“A bullish technical cross in the moving averages also added to some of the upward momentum,” he says, adding that tech and telcoms are two of the best performers.

“However, most of the gains were driven by a +2.5% move in energy, supported by a 4% gain in oil prices (on a possible extension of cuts),” he says.

Read: Finding long-term value above the oil price noise

Materials lagged as the prices of precious metals dropped, and large caps outperformed on slightly better volumes.

Sagoo also notes that, as the loonie weakens against the U.S. dollar, “asset manager shorts have been steadily increasing throughout October against the C$.”

S&P keeps rising

The S&P 500 rose 0.2% last week, as U.S. GDP growth for Q3 came in at 3%.

Read: U.S. GDP in last 2 quarters best since 2014

In a weekly equity report, Robert Kavcic, BMO senior economist, notes that Q3 earnings results for index constituents “suggest corporate profits are in solid shape.”

With half of S&P 500 constituents reporting, about 76% beat earnings expectations, he says, up from the 71% seen over the last four quarters.

“We’ll just reiterate that, after a mini profit recession through 2015 and early 2016, the run over the past four quarters continues to seem unappreciated, and has helped keep valuations in check despite record prices by the day,” he says.

He also notes that “the rally in stocks this year has come alongside fading support from buybacks and dividends,” which were US$900 billion for the index in the four quarters through Q2 of 2017, down from the US$974-billion high set a year earlier.

“As a share of the index’s market cap, combined dividends and buybacks are now running at the lowest rate since very early in the recovery,” he says. “Part of it is the result of simply not keeping up with the pace of stock price gains, and part of it likely reflects the pickup in business investment over that period.”

Read: When share prices increase without justification

Going forward, the S&P 500 would be further supported by potential unrestricted profit repatriation (i.e., the go-ahead to buy back stock and/or pay dividends), but details on that are still grey, says Kavcic.

Support would also be provided by potential U.S. tax reform (i.e., a lower corporate tax rate).

To the downside, potential challenges include a stronger U.S dollar, which dampens earnings, as well as measures to control the U.S. deficit.

Referring to challenges for S&P 500 firms, Nick Exarhos, director at CIBC World Markets, says in a weekly economics report, “Cost pressures [for firms] typically build as we head deeper into the cycle, in particular from firmer wages.”

Further, “Most firms across most industries in the S&P have reported slippage in margins from a year ago,” he says. “That should continue into the new year, leaving stocks particularly susceptible to news from Washington on tax reform.”

Read the full reports from BMO and CIBC.

Also read:

30 years after Black Monday, what could slow the S&P’s bull run?