Stan Wong, portfolio manager at Scotia Wealth Management

FOCUS: North American large caps and ETFs 

MARKET OUTLOOK:

While it may be hard to believe, last week marked the one-year anniversary of major equity markets hitting their October 2022 bear market lows. Since then, both the MSCI World Index and S&P 500 Index have climbed over 20 per cent while the Nasdaq Composite Index has jumped over 30 per cent. Here at home, the S&P/TSX Composite Index has advanced eight per cent since the October 2022 lows. Indeed, the past year has showcased the resiliency of the equity markets, as they have demonstrated remarkable strength despite a backdrop of geopolitical unrest, rising interest rates and worries of a potential recession. Of course, market breadth has been persistently weak, with the technology and communications sectors primarily driving the bulk of the returns over the past year. Looking ahead, we expect market breadth to expand to other sectors and provide investors with broader market participation.

More recently, the months of August and September proved to be challenging for stocks. However, historical seasonality trends suggest the potential for a fourth-quarter rally for equities. The fourth quarter has historically been the strongest part of the year, posting an average return of 4.2 per cent for the S&P 500 Index since 1950. In addition, it’s worth noting that for the S&P 500 Index since 1950 (based on 15 observations), the second year of a bull market has consistently yielded positive results, with an average return of 13.5 per cent.

At the Stan Wong Group, we maintain a constructive outlook on equity markets. While certainly not defeated, inflation is subsiding with year-over-year (YoY) inflation in the U.S. now at 3.7 per cent, significantly lower than last summer’s high of 9.1 per cent. Looking ahead, we anticipate both Bank of Canada overnight rates and the U.S. Federal Funds Rate to stabilize, with potential downward movement by mid-to-late 2024. Historically, such a stable interest rate environment has provided a favourable backdrop for both equities and bonds. Furthermore, S&P 500 earnings estimates have improved, driven by better-than-expected economic data, robust U.S. consumer spending and a healthy labour market. Overall, we believe that the likelihood of a severe U.S. economic contraction has considerably diminished.

In Stan Wong Managed Portfolios, we maintain our focus on seeking what we deem to be high-quality, secular growth equities to add to our portfolio mandates. We favour the consumer discretionary, health care, and energy sectors, along with technology companies that exhibit reasonable valuations. Geographically, our equity allocation encompasses approximately 51 per cent in U.S. equities, 29 per cent in Canadian equities, and 20 per cent in international equities. Within our fixed income allocation, we prefer government and investment-grade corporate bonds with both short and medium durations. Fundamentally, our overall strategic allocation is carefully constructed to boost returns while effectively mitigating risk for our clients.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS

AMAZON.COM (AMZN NASD)

Last bought this month around US$123

With nearly US$570 billion in projected 2023 revenue, Amazon continues to be a dominant force in e-commerce, cloud services, digital streaming, and artificial intelligence. Amazon’s strategic expansion into other industries, including healthcare and logistics, not only unlocks substantial growth avenues but also diversifies revenue streams. Amazon Web Services (AWS), the cloud segment, continues to gain significant traction. AWS now commands about one-third of the world’s market share in cloud infrastructure. Moreover, the company’s high-margin advertising business continues to scale quickly and should enhance profitability in the coming years. The impressive expansion of Amazon Prime, with over 200 million paying members today with a 97 per cent renewal rate, underscores the company's exceptional customer loyalty. Looking ahead, Amazon’s annualized earnings growth rate is anticipated to exceed 25 per cent. AMZN reports its next quarterly results on Oct. 27.

MASTERCARD (MA NYSE)

Last bought this month around US$389

With projected 2023 revenue exceeding US$25 billion, Mastercard is the second-largest global digital payments company in the world, operating in over 210 countries and in more than 150 currencies. Solid consumer spending, post-pandemic travel demand and higher cross-border transaction volumes have lifted recent and near-term earnings prospects for Mastercard. Longer-term, Mastercard’s extensive global network, formidable brand recognition and technological advancements allow for a highly sustainable competitive advantage, protecting market share and profitability. Indeed, there is plenty of runway for growth in the electronic payments industry. Effectively operating in what is a “tollbooth business,” Mastercard earns transaction, network and licensing fees regardless of whether payments are credit, debit or mobile. Late last year, the company initiated a shareholder-friendly US$9 billion share buyback program which it has been executing this year. Mastercard is forecasted to achieve an earnings-per-share growth rate of about 17 to 18 per cent over the next several years. The company reports its next quarterly results on Oct. 26.

NOVO-NORDISK (NVO NYSE)

Last bought this month around US$91

Headquartered in Denmark, Novo-Nordisk is a leading global healthcare company with nearly US$32 billion in forecasted 2023 revenue. Recently crowned as Europe’s most valuable company by market capitalization, Novo-Nordisk is a global leader in diabetes care and obesity treatment drugs. Indeed, 50 per cent of the world’s insulin supply is produced by Novo-Nordisk and over 36 million people worldwide use the company’s products. Last week, management raised its outlook for its sales and profit for the third time this year as demand soars for its blockbuster weight loss drug, Wegovy and diabetes treatment drug, Ozempic. The company now expects sales growth of as much as 38 per cent this year and operating profit as high as 46 per cent. In a recent Bank of America research report, the firm estimated that 48 million people in the U.S. will have used obesity treatment medications by 2030, from a current level of about one million people. Novo-Nordisk is forecasted to deliver a remarkable earnings per share growth rate of 25 per cent over the next several years. The company reports its next quarterly results on Nov. 2.

PAST PICKS: October 26, 2022

EXXON MOBIL (XOM NYSE)

• Then: US$107.14
• Now: US$109.83
• Return: 3%
• Total Return: 6%

STARBUCKS (SBUX NASD)

• Then: US$85.89
• Now: US$93.25
• Return: 9%
• Total Return: 11%

WALT DISNEY (DIS NYSE)

• Then: US$104.63
• Now: US$85.15
• Return: -19%
• Total Return: -19%

Total Return Average: -1%