Bank of America's Canada Cycle Indicator (CCI) has turned positive, signaling a bullish outlook for Canadian stocks, the investment bank said in a note Wednesday.
BofA said this is the first time the CCI has been in positive territory since March 2023, following eight consecutive months of improvement.
According to Bank of America, "the CCI is rising when other indicators are starting to weaken," suggesting that Canada may be an attractive alternative in the current uncertain macroeconomic environment.
Historically, when the CCI is positive, the TSX outperforms the S&P 500 (SPX) 60% of the time by an average of 4.2 percentage points over a 12-month period, according to BofA.
The bank adds that recent trends already reflect this potential, with the TSX having outperformed the SPX by 3.3 percentage points since June.
However, they note that sustained outperformance will likely require higher commodity prices, which have been a significant drag on the CCI.
Earnings season is also said to have provided a boost to Canadian stocks. With around 90% of Q2 earnings reported for the TSX 60, earnings per share (EPS) grew 12% year-over-year, beating consensus estimates by 3.5%.
BofA explains that this marks the strongest EPS growth since Q3 2022 and is notable for outpacing the S&P 500's 10% growth for the first time since Q4 2022.
Furthermore, the bank argues that valuation also favors the TSX, which trades at just 14.7 times forward P/E, lower than its historical average of 15.4 times. On a relative basis, they note that the TSX is at its steepest discount to the S&P 500 in history, trading at just 0.7 times forward P/E compared to the S&P 500.
Given these factors, Bank of America’s indicator suggests that Canadian stocks may offer compelling opportunities for investors in the months ahead.