Michael Hakes, senior portfolio manager, Murray Wealth Group

FOCUS: U.S. and global stocks 

MARKET OUTLOOK:

 We believe the market will be choppy for the remainder of the year as the U.S. Federal Reserve stays data-driven. As we look out to 2024, we are cautiously optimistic for renewed growth in the markets.

Earnings per share (EPS) growth for the S&P 500 for this year will probably be up only one per cent versus 2022. Earnings will come in at around US$223 for the S&P in 2023. In 2024, EPS growth could reach high single digits.

Soft landing expectations are already reflected in the market, but we would not be complacent, as there are many warning signs that could upend this landing.

Consumers are the key, as they drive two-thirds of U.S. gross domestic product (GDP), and we feel they could be close to a breaking point. There has been lots of early evidence of this, with weakness in Macy’s, Best Buy, Nike and Target. Dollar General has been weak in part because of increased shrink (or theft). Other retailers have highlighted shrink as an issue. Consumers are changing their purchasing behaviour and only buying essentials, and very few discretionary items. Walmart, Target and others talked about these trends.

The resumption of U.S. student loan payments and the impact of higher mortgage rates will weigh on consumer spending as we move through the fall.

Consumer confidence saw declines in August. The measure for future expectations slid to 80.2 from 88 in July. A reading below 80 historically signals recession within one year.

We at Murray Wealth are focused on the companies we own and their long-term business prospects. Our concentrated Global Growth fund has core holdings in leading growth stocks in technology, healthcare and social media which we believe still have years of growth ahead.

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TOP PICKS:

Target (TGT NYSE)

Target is a well-known General Merchandise retailer with almost 2,000 stores in the U.S. With over $100 billion in sales, the company experienced a huge setback in margins in 2022. Gross margins declined 470 basis points (bp) in 2022 from 2021 and operating margins declined 490bp over the same period. These declines were primarily caused by supply chain dislocations and bigger-than-normal swings in discretionary purchases as the Fed rate hikes took hold and impacted the consumer. The stock has pulled back from its $260 high in late 2021 and is now trading at the $133 level. We feel the operational challenges are close to turning around and barring an outright recession, the company will begin to show good margin improvements over the next 18 months or so. This mature retailer is trading well below its historical valuation, and we feel could be great value for long-term investors.

Morgan Stanley (MS NYSE)

Morgan Stanley has several different segments including Wealth Management and Investment Banking. The stock is up two to three per cent year to date, so lagging the S&P by quite a lot as earnings have pulled back over the last year or so. They also missed in the second quarter as investment banking remained weak.

As we look forward to next year, we see Morgan Stanley rebounding to over $100 as the Investment banking business bounces back.

Thermo Fisher Scientific (TMO NYSE)

Over the last 15-20 years, Thermo Fisher has consolidated the highly fragmented Life Sciences tools and diagnostics industry. It is now the leader in life sciences solutions, specialty diagnostics, laboratory products and biopharma services.

It is benefiting from favourable demographics driving increased healthcare demand and ongoing scientific advances in life science research. Also, it has fast-growing end markets and a high recurring revenue mix. We expect the company can deliver seven to nine per cent revenue and low double-digit earnings growth over the next three to five years.

We think the stock can trade into the $600 range over the next 12-18 months.

PAST PICKS: December 7, 2022

Aritzia (ATZ TSX)

• Then: $49.34
• Now: $22.82
• Return: -54%
• Total Return: -54%

Qualcomm (QCOM NASD)

• Then: US$118.21
• Now: US$113.90
• Return: -4%
• Total Return: -2%

Eli Lilly (LLY NYSE)

• Then: US$371.97
• Now: US$586.99
• Return: 58%
• Total Return: 59%

Total Return Average: 1%