The Motley Fool

TSX Stocks: Why the Market Rally Seems to Have Reached a Crucial Point

Image source: Getty Images

It’s been a fantastic comeback for TSX stocks in the last two months. Stock markets continued to soar despite increasing tensions on the pandemic front.

The TSX Composite Index has risen more than 30% since its 52-week low in March. Surprisingly, despite entering a recession this month, Canadian stocks at large have maintained positive momentum. However, the market rally seems to have reached a critical point now, and upside from here looks limited.

Uncertainties multiply

TSX stocks took a break from their upward climb and lost more than 2% last week. It looks like market participants are gradually admitting that the re-opening of economies is not going to be that easy. Countries have seen a surge in COVID-19 cases where lockdowns are partially released.

Thus, business activities might take longer than expected to recover, and the economic downturn could get more severe. Some even anticipate a second and third wave of the pandemic, which could further deteriorate the situation.

To add to the woes, already-stained U.S.-China trade relations are further spoiling amid the COVID-19 blame game. The out-and-out trade war had a big dent on the global economy last year. These uncertainties might dampen corporate and investor sentiment in the near future, which might significantly weigh on the stock markets.

Top Canadian banks will release their quarterly earnings next week. While the earnings period covers most of the lockdown days, the numbers are not expected to be pretty. How provisions impact banks’ bottom lines remains to be seen.

Furthermore, how TSX bank stocks respond to these numbers will also be interesting to see. Banks are the biggest constituents of the TSX Index, and their fall could notably bulldoze the broad market index.

The biggest of them all, Royal Bank of Canada will report its quarterly numbers on May 27, while Bank of Nova Scotia will report on May 26. Both these stocks have lost more than 25% in the pandemic-driven market crash so far.

Top TSX stock to watch this week

Air Canada (TSX:AC) stock could continue to trade weak this week as well. The country’s biggest airline is grappling with challenges, and investors’ fears are not expected to wane soon.

Last week, the airline announced to trim 20,000 to 22,800 workers from June 7 as a cost-cutting measure, approximately 60% of Air Canada’s total workforce. The aviation sector in the country has not heard anything firm relating to the government aid so far.

Top TSX stock Air Canada has lost more than 25% since its first-quarter earnings earlier in the month. The stock has fallen more than 70% so far in the pandemic-driven weakness. Air Canada reported steep losses in the first quarter, and those could further swell for the current quarter.

Air Canada is already operating at some 10%-15% capacity amid closed borders and travel restrictions. It might restart partial operations in July, but fear and uncertainty might continue to dominate flyers.

The pandemic could dent its bottom line for several quarters, and that could notably weigh on the Air Canada stock.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.