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The S&P 500 is down 5 per cent from the July 31 high but BofA U.S. quantitative strategist Savita Subramanian believes the worst is behind us and that government fiscal initiatives are set to drive North American profits and markets higher.

U.S. earnings expectations for the third quarter indicate no change in year-over-year terms after a loss of 6 per cent in the second quarter. Ms. Subramanian, who has been my favoured source for U.S. earnings analysis for at least a decade, forecasts profits growth 4 per cent ahead of consensus.

BofA believes that artificial intelligence will eventually improve S&P 500 operating profit margins by 250 basis points but in the short term, fiscal spending from the Infrastructure Investment and Jobs Act (IIJA) and then from the Inflation Reduction Act (IRA) will have a bigger positive effect.

The IIJA, designed to improve U.S. transportation networks, will add US$550-billion to fiscal spending over the next five years and benefit numerous industrial stocks. So far out of that total, there has been US$116-billion in (largely clean energy) projects announced under the IRA and spending is expected to accelerate.

Recession fears abound but Ms. Subramanian notes that U.S. economic data continues to come in ahead of consensus estimates, according to the Citi Economics Surprise Index.

The end result of BofA’s analysis is that U.S. profit growth is bottoming and set to move higher, particularly for energy and industrial stocks.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Peyto Exploration & Development Corp. (PEY-T) In the first half of 2023, the share price declined 21 per cent. In the third-quarter, the stock rebounded, rallying 25 per cent. As Jennifer Dowty tells us, the stock is benefitting from recent strength in the price of natural gas, but there is now a key risk that warm winter weather will lead to soft demand.

The Rundown

Inured to edgy geopolitics, markets deflect risk

The modest reaction of global markets to the shock of another Middle East war says more about an investment world already braced for more turbulent times than nonchalance per se. As Reuters’ Mike Dolan reports, even by the standards of recent decades, the speed with which investors shifted focus away from the deadly weekend attacks by Hamas on Israel and Israel’s declaration of war in response has been extraordinary.

The time has arrived for investors to start buying long-term bonds

After the spikes in yields of the past few weeks, the best opportunities of where to buy in the credit sector have shifted, says veteran bond portfolio manager Tom Czitron. Longer-term bonds now appear to be a better bet.

Also see:

PIMCO bullish on U.S. bonds as inflation cools, growth set to slow

Spike in Treasury yields clouds Biden, Fed hopes for smooth return to normal

Rob Carrick: Bonds are once again wrecking your investment returns

An AI productivity boom is upon us, and market watchers are excited

Nvidia Corp.’s (NVDA-Q) share price has gained more than 200 per cent in 2023, illustrating how the promise of artificial intelligence has been good to tech behemoths. Could the same theme broaden out and reward far more stocks? That’s a scenario some market strategists are now mulling, and they are using the internet-fuelled boom of the 1990s as a template for productivity gains – and potential stock market rallies. David Berman tells us more.

Why is this retiree having so much trouble finding a financial planner to help him draw on his savings tax-efficiently?

One of the hardest jobs in financial planning is helping people turn a lifetime’s savings into tax-efficient retirement income. Rob Carrick profiles one Canadian couple who are finding this out the hard way.

Even in a difficult market, FOMO is alive and well

Investors are said to feel the emotional pain of a loss twice as intensely as the pleasure of an equivalent gain. For decades, this idea has served as a foundational principle of behavioural economics. How then to explain the latest retail boom in zero-days-to-expiration options, which represent single-day bets on the direction of markets? Tim Shufelt shares some insight.

Renewables funds see record outflows as rising rates, costs hit shares

Investors ditched renewable energy funds at the fastest rate on record in the three months to end-September as cleaner energy shares took a beating from higher interest rates and soaring material costs, which are squeezing profit margins.

Others (for subscribers)

U.S. bank ETFs suffer sharp outflows ahead of results

Wednesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: CEO invests over $3-million in this REIT

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: Director cashes out $34-million from this large-cap energy stock

Globe Advisor

Why this money manager is trimming U.S. tech stocks and adding more Canadian industrials

U.S. cannabis reforms could send pot stocks higher

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Ask Globe Investor

Question: I would like to get your opinion on two ETFs I have had for years and are down badly. They are CBO and XRB. Thanks for your help. – Joe F.

Answer: CBO (CBO-T) is the trading symbol for the iShares 1-5 Years Laddered Corporate Bond Index ETF, which trades on the TSX. It invests in a portfolio of short-term bonds, with maturities staggered so that about a fifth of the portfolio matures each year.

A fund such as this is normally very low risk. But the last couple of years have been anything but normal in the bond market, with rising interest rates and an inverted yield curve disrupting investors’ calculations.

Still, the losses haven’t been as bad as you imply. CBO was down 4.6 per cent in 2022 and 1.1 per cent the year before. Prior to that, it was modestly profitable most years, and it is ahead 1.39 per cent this year (to Oct. 5). The average annual compound rate of return since the fund was launched in February 2009 was 2.41 per cent, as of Sept. 30.

I think the worst is behind us for this fund. But don’t expect big profits from it. This type of ETF is viewed as a low-risk parking place for money, not a capital gains grower.

As for XRB (XRB-T), this is at the other end of the bond spectrum. The full name is the iShares Canadian Real Return Bond Index ETF. It invests in long-term inflation indexed bonds (effective duration 12.82 years). This is high-risk territory, and the results show it. The fund lost 14.7 per cent last year and is off 8.82 per cent year to date. Over the past decade, the fund shows an average annual compound rate of return of only 1.12 per cent.

I normally don’t recommend long-term bond funds because of the risk, although a fund like XLB (iShares Core Canadian Long Term Bond Index ETF) should do well when the interest rate cycle turns back down. A universe bond fund like XBB (XBB-T) (iShares Core Canadian Universe Bond Index ETF) is a good middle-ground choice. That said, there is probably more downside to come in the bond market before things start to improve.

--Gordon Pape (Send questions to and write Globe Question on the subject line.)

What’s up in the days ahead

Rob Carrick will report on just how popular Tax-Free Savings Accounts have become for Canadians.

Click here to see the Globe Investor earnings and economic news calendar.

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