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A man watches stock tickers in Toronto's financial district on May 9, 2014.

Darren Calabrese/The Canadian Press

Canada’s main stock index is set to extend its rebound over the coming months as well as in 2021, but will fall short of previous expectations as the global economy struggles to fully recover from the coronavirus crisis, a Reuters poll found.

The commodity-linked S&P/TSX Composite index has rallied about 35 per cent since plunging in March to a more than eight-year low, supported by steps to reopen the world economy and a rally in oil prices after U.S. crude hit a record low.

The median forecast in a survey of 25 portfolio managers and strategists was for the TSX to rise 2.9 per cent to 15,590 by the end of 2020 from a closing level of 15,148.12 on Tuesday. In February, when the index notched a record high at 17,970.51, the forecast was 18,175.

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The TSX is then expected to climb further to 17,000 by the end of 2021.

“Despite a deep recession, the current equity rally has legs,” said Dominique Lapointe, a senior economist at Laurentian Bank Securities. “Investors are seeing through the downside and still expect the level of business profitability to return to some form of normality in the future.”

The Bank of Canada expects the domestic economy to shrink as much as 30 per cent in the second quarter from the fourth quarter of 2019. It has slashed interest rates to near zero and begun a large-scale bond-buying program for the first time, while Ottawa is rolling out about $300-billion of economic support measures.

Investors say that economic stimulus, low interest rates and progress on containing the coronavirus pandemic are supportive of stocks but it could take some time for activity to get back to its prior level.

“The bounce-back in activity will be sharp coming out of very depressed levels. However, absent a medical breakthrough [on a vaccine for the novel coronavirus], it won’t be as vigorous later,” said Angelo Kourkafas, investment strategy analyst at Edward Jones. “We therefore believe GDP and earnings will take several years to reclaim the precrisis highs.”

Energy and basic materials make up nearly 30 per cent of the TSX’s market capitalization, so the TSX tends to be sensitive to the outlook for global growth.

Financials account for a further 30 per cent. They have been supported in recent years by a strong domestic housing market that has been accompanied by record levels of borrowing by Canadians.

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“The financial vulnerabilities that have been building in Canada for a while now, namely elevated household debt levels and a frothy housing market, will be major headwinds for full economic recovery,” Mr. Kourkafas said.

Global stocks

This year will be the worst for many world stock markets in nearly a decade at least, although a majority of equity strategists polled by Reuters say top indexes will not revisit lows struck this March after an explosive rally since then.

Macroeconomic data point to a deep global recession, with widespread expectations among economists and longer-term fund managers for a slow and elongated rebound, not to mention warnings from the Federal Reserve as well.

But equity markets, flooded with central bank cash, have rallied over the past two months on expectations of a sharp, vigorous recovery, even as the coronavirus pandemic is still spreading, having infected more than 5.7 million people worldwide.

The May 12-27 Reuters polls of more than 250 analysts across Asia, Europe and the Americas, showed predictions broadly focused on economies and businesses swiftly reopening from lockdown, with 11 of the 17 indexes expected to rise from here by end-year.

Nearly 70 per cent of respondents, 76 of 111, who answered an additional question said the 2020 lows would not be retested.

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That is despite several risks still in play, including: a second wave of the virus; uncertainty on when or if ever company earnings will fully recover; smoldering U.S.-China tensions; and the coming U.S. presidential election.

That disconnect between what equity markets are pricing in and economic prospects is coming under closer scrutiny.

“I keep repeating that some markets are not properly reflecting reality and that the power of markets is not in their elevated heights but in their honest price discovery,” said Michael Every, global strategist at Rabobank.

“They are supposed to be the little boy pointing out that the emperor has no clothes. If they don’t do that, they aren’t good for much,” he wrote.

At a time when the U.S. economy has suffered its biggest job losses since the Great Depression of the 1930s, the S&P 500 is up more than a third since its March 23 low.

Yet despite unprecedented monetary and fiscal stimulus, the 17 indexes polled on – all in the red so far this year – were forecast to end 2020 lower than where they started the year.

Asked when the low point for earnings would be, around 43 per cent, or 40 of 93 respondents, said this quarter. Nearly 27 per cent picked the third quarter and the remaining 30 per cent said the fourth quarter or later.

But growth in year-on-year profits is not expected before the first quarter of 2021 for companies listed on the S&P 500 and the STOXX 600, according to I/B/E/S data from Refinitiv.

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