S&P/TSX Should Hit 10,000 in 2009 - BMO

While stock prices are far from discounting a depression, they are at least pricing in a serious recession that extends well into 2009, according to Ben Joyce, managing director of portfolio strategy at BMO Capital Markets.

If the S&P/TSX composite index has reached its bottom, this would be consistent with BMO’s forecast of a drop in operating earnings to C$620 in 2009. This is expected to coincide with the trough in trailing operating earnings, representing a 33% decline from the recent peak of C$925.

Meanwhile, if the bank is accurate in its forecast for an earnings recovery to C$750 in 2010, Canada’s benchmark index should recover to 10,000 during the next 12 months, Mr. Joyce told clients. His one-year price target for the S&P 500 is 1,050.

He said in a research note:

The retreat in the loonie from parity with the greenback should help limit the severity of the earnings decline. Unfortunately, given the history of volatility in commodity prices, there is a 30% chance that earnings will fall more than we are forecasting.

The strategist forecasts S&P 500 operating earnings will slide to C$69 in 2009, troughing at C$65.90 in the fourth quarter, then recovering to C$78 the following year. “This peak-to-trough decline represents a recession that is both deeper and longer than the postwar average,” Mr. Joyce said, adding that the recent declines in energy and materials costs will mitigate the 2009 dip in earnings for the S&P 500 as it is a net consumer of commodities.

His sector strategy focuses on consumer discretionary and transportation stocks, which “have a good record of leadership in the first year of a new bull.” For a defensive hedge, he likes the gold and telecommunications sectors.