With the TSX currently hovering around an all-time high, many investors may be wondering if stocks will ultimately end the year even higher, or if some sort of sell-off can be warranted moving forward.
There are good reasons for such a view. Unemployment in Canada has continued to tick higher, which the Bank of Canada has sought to limit with a slew of interest rate cuts of late. But the question many investors may have is whether the global financial markets will hold up, and whether the TSX could get caught in the crossfire.
Let’s dive into three key signals for investors to watch as we head into the fourth quarter.
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Earnings growth
Ultimately, a given company should see its valuation increase over time, if said company can continue to increase its earnings and cash flow in a consistent (and preferably accelerating) fashion.
Stocks are valued (or supposed to be valued) as the sum total of their future projected cash flows. As such, fundamentals matter. And while bubbles can cause all sorts of valuation dislocations (some would argue AI is causing such a situation to unfold right now), it’s also true that earnings growth and momentum on this front can lead to a logical increase in multiples across the board.
The Canadian market has seen strong earnings growth in the past few quarters, and most analysts are projecting double-digit average earnings growth for companies in the TSX. That’s good enough to propel most of this year’s move in the country’s largest index, and there’s a fundamental reason why so many investors are looking at Canadian stocks right now for this reason.
Central bank policy
Aside from the Federal Reserve and perhaps the European Central Bank, the Bank of Canada could be the most-watched central bank in the world. What Tiff Macklem and his team decide on interest rates means a great deal not only for valuations domestically, but how interest rate policy is set around the world.
The Bank of Canada has been more dovish than other central banks of late. That’s helped support the country’s resource-rich and export-intensive economy. So long as such a dovish stance remains in place, the TSX is one market that could benefit from increasingly dovish (at least on a relative basis) monetary policy.
Commodity price movements
The downside of having such a resource-rich and commodity-based economy is that any sort of commodity price volatility can have a negative impact on the market as a whole.
Fortunately for investors in a range of Canada-based mining or energy stocks, most of the price surprises we’ve seen of late have been positive. Precious metals continue to hover around all-time highs, and the TSX is where most major global gold miners happen to be listed. And despite softening oil prices, Canadian producers have held up particularly well, due in part to the preferential treatment this sector has seen in the new tariff-driven trade policy era we’re in.
These three factors are among the ones I’m watching most closely right now. Long-term investors looking to put capital to work in the Canadian markets may be wise to do the same.
