As we head into the summer months, U.S. equity markets continue to inch higher with all three major indices south of the border marking new highs just last week. While valuations are somewhat extended for U.S. equity indices, steady corporate earnings momentum could help stocks grind even higher. If proposed tax reform and deregulation policies eventually become law later this year or next, this would further act as a positive catalyst for U.S. equities.
Here in Canada, the TSX has been caught in a sideways trend since the beginning of the year but could stage a recovery in the second half of the year with its two largest weighted sectors leading the way. With oil prices bumping near the bottom of its trading range, energy stocks could form a countertrend rally while rising interest rates could help financial stocks recover. Indeed, the energy and financials sectors have been underperformers year-to-date and represent a combined nearly 55 per cent weighting in the TSX.
From a global perspective, economic growth and earnings forecasts continue to improve in all major regions. In Europe, political risks are substantially diminished while GDP accelerates and corporate earnings expand for the first time in six years. Across Asia and emerging markets, the earnings backdrop also appears encouraging with economic reforms providing support. Looking at valuation metrics, international equity markets are presently more compelling than North American equity markets and provide investors with an attractive opportunity to add to positions overseas.
In Stan Wong Managed Portfolios, we are overweight in the financials, technology and consumer discretionary sectors while underweight defensive areas such as utilities, real estate and consumer staples. We also generally favour high-quality stocks and expect dividend growers to outperform dividend payers. We are balanced between growth and value stocks but expect value stocks to outpace growth stocks moving forward as interest rates move higher. Looking ahead, we are adding to international equity markets as we expect these positions to generally outperform North American equity markets given the valuation discounts. Lastly, we note that volatility measures are currently near lows so while we are very constructive on equities over the intermediate term, we are prudently cautious when putting new money to work.