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Is the Rally on the Toronto Stock Exchange Coming to an End?

The Toronto Stock Exchange (TSE) was one of the best performing indexes at the start of the year. After the best start to a year since 2000, the TSE continued to hit new highs on record profit forecasts. Despite the strong start to the year, fresh highs in late September, and investor optimism, the outlook for the fourth quarter looks exceptionally bearish.

The TSE started 2019 off with a bang, benefiting from the January Effect on steroids. By the end of May, the TSE had advanced 17.0%. Since then though, the TSE has traded in a tight range, and the outlook for the fourth quarter remains downbeat.

Most analysts expect the TSX to end 2019 at 16,940. That represents an impressive 18% gain on a year-over-year basis, but it’s just 1.7% ahead of where the TSE closed at the end of the third quarter. What does the future hold for the TSE?

Will the Trade War Upend the TSE?

There is a lot of ongoing uncertainty and large number of potential headwinds that could derail the TSE in the fourth quarter. There’s almost a sense of déjà vu. Last year at this time, the outlook for the TSE was bullish; then we entered the fourth quarter and the broader markets experienced a major rout, fuelled by then fears of the burgeoning trade war between the U.S. and China and weak earnings growth.

Fast forward one year and those same fears remain. The ongoing trade war between the U.S. and China is being blamed for weak economic data coming out of the two countries and the slowing global economy.

According to the most recent data, Canada’s economy is slowing. After four months of growth, the Canadian economy stalled in July, as the mining, quarrying, and oil and gas sectors contracted. The news, which was reported in early October, sent the Canadian dollar tumbling to $0.7524 U.S.

Could Third Quarter Earning Stall TSE Rally?

The earnings outlook for the third quarter of 2019 also remains bleak, with Canadian stocks feeling the pain of the U.S./China trade war and global economic slowdown.

The estimated earnings decline for the S&P 500 is -4.1%. If this is the final number for the quarter, it will be the first time the S&P 500 has reported three consecutive quarters of year-over-year declines since the fourth quarter of 2015.1

Of the 113 companies that have, so far, issued earnings per share (EPS) guidance for the third quarter, 82 (73%) have issued negative EPS guidance. That’s above the five-year average of 70%.

What Other Headwinds Is the TSE Facing?

The U.S/China trade war and weak earnings are enough on their own to upend the TSE in the fourth quarter. But there are many additional headwinds that could drag the TSE lower.

Weak oil and gas prices are taking their toll on Canadian equities, so much so that there is a serious lack of interest in Canada’s energy sector. As a result, the market cap of some of the country’s biggest and well-known natural gas and drilling companies have fallen below the threshold for being listed on the TSE.

There are other reasons why Canadian investors should be cautious over the coming weeks: U.S/China trade talks are resuming, the Canadian federal election, and the Bank of Canada will make its next rate announcement on October 30.

And that’s just in October; there are plenty of other factors that could negatively impact the TSE in November and December, like ongoing impeachment talks and fears of a recession.

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Sources:

  1. “Earnings Insight,” Factset, October 4, 2019; https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_100419A.pdf

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