Valuations for North American equity markets continue to appear somewhat extended. The S&P 500 index currently trades at a multiple of 18 times forward price-earnings while the S&P/TSX composite index trades at a multiple of 19 times forward price-earnings. The historical 10-year average forward price-earnings multiple for both North American indexes is closer to about 14 times. While exceptionally low interest rates continue to act as a safety net for equities, an improvement in corporate earnings growth remains the key variable for equity markets to move meaningfully higher.
In the meantime, the 2,115 level (an area of overhead supply) represents upside resistance for the S&P 500 index while the S&P/TSX composite has remarkably pushed higher this year on the back of its resource sectors. Near-term market anxieties include a sluggish corporate earnings picture, weak global economic growth, geopolitical tensions, an uneasy U.S. political backdrop and of course, the timing of Federal Reserve interest rate hikes. Given this setting, North American equity markets will likely remain rather bumpy and range bound in the coming months ahead.
In Stan Wong Managed Portfolios, we prefer large-cap, high quality North American companies with strong balance sheets, reliable earnings streams, growing dividends and lower beta attributes. As we move into the late cycle phase of the economy and stock market, we continue to believe that today’s market environment requires active portfolio management with tactical stock selection and defensive risk controls including stop loss strategies.