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Goldman Sachs, BofA Securities and Morgan Stanley are just three firms where strategists believe that markets will fall sharply in the first half of 2023, thanks to falling profit estimates, before recovering in the latter part of the year. This outlook is so ubiquitous that BofA U.S. quantitative strategist Savita Subramanian wrote “A slew of first-half bears is forming and makes us nervous about our outlook.”

The reason the strategist is nervous is that high consensus forecasts tend to be wrong. Famed Merrill Lynch strategist Bob Farrell’s rules of investing includes “When all the experts and forecasts agree — something else is going to happen.”

But making an assumption that the bad first half/good second half forecast is wrong is not that helpful because the ways in which they could be wrong are too numerous to count.

Will the first quarter of the year see the S&P 500 fall more than Goldman Sachs’ 9 per cent estimate? Maybe. Will inflation pressure persist, pushing the market recovery out to 2024? Entirely possible. Will earnings growth hold up better than expected, and stocks rally through the entire year? Could happen.

The year ahead forecasts are useful to the extent they identify the most important factors for investors to watch. In early 2023, that will be forward earnings assumptions, developed world wage growth and global economic growth - and probably in that order. If the forecasts are wrong about the path of markets but right about which market drivers matter most, I will be ok with that.

-- Scott Barlow, Globe and Mail market strategist

Also see: 2023 market predictions - when the outrageous and plausible blur

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The Rundown

TSX outperformance but more housing market pain and a recession: What a senior BlackRock strategist is predicting for 2023

This has been a challenging year for stock and bond investors, and another one may be ahead. Global investment management firm BlackRock believes a recession is on the horizon, North American stock markets are headed lower, and the housing market will remain under pressure. Jennifer Dowty speaks with Kurt Reiman, the firm’s senior strategist for North America, on his outlook and investment recommendations for 2023.

Why we should welcome the yield curve inversion

Canada’s bond market is emitting its clearest warning in decades that an economic downturn lies ahead. All things considered, that is good news, says Ian McGugan.

Are Canadian investors sleepwalking toward a recession?

While many economists see a recession as unavoidable, the stock market isn’t buying it yet, as Tim Shufelt reports.

Ordinary investors who jumped into crypto are saying: Now what?

Millions of individual investors around the world poured money into digital assets, believing the cryptocurrency industry was a stable financial system. They were cleareyed about the volatility and big price swings of bitcoin and other cryptocurrencies. But what has come as a big surprise to many is that the firms where they deposited their money lacked the basic protections offered by a brokerage or a bank. The New York Times tells some of their stories.

Others (for subscribers)

Gordon Pape: My outperforming Buy and Hold Portfolio shows the value of buying good stocks and keeping them

Analysts’ forecast returns and recommendations for all stocks in the S&P/TSX Composite Index

Number Cruncher: Ten U.S. dividend growth stocks that appear undervalued

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Monica Rizk: Bullish on Canadian Natural Resources

Vietnam-based EV maker Vinfast files for U.S. IPO

Globe Advisor

COVID-19 vaccine makers’ shares slump, but there’s upside as other products hit the market

There is no alternative to alternative assets

Anti-beta strategies that provide uncorrelated returns hit fever pitch – but what are the risks?

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Ask Globe Investor

Question: In a recent column, John Heinzl discussed why he added more BCE Inc. (BCE-T) shares to his model dividend portfolio. Could you comment on the ratio of dividends to net earnings? It looks to me from a quick calculation that their dividends exceed net earnings of late. Am I missing something in the accounting that explains this and maintains the attractiveness of the stock?

Answer: True, BCE’s annualized dividend of $3.68 a share exceeds its estimated 2022 earnings of $3.40 a share, according to analysts surveyed by Refinitiv. The payout ratio, based on earnings, is about 108 per cent.

That’s not ideal, but it doesn’t mean the dividend is in any danger, either.

BCE uses a different, less stringent, method to determine its payout ratio. As the company explains in the investor relations section of its website: “We seek to achieve dividend growth while maintaining our dividend payout ratio within the target policy range of 65 per cent to 75 per cent of free cash flow.”

Free cash flow is generally defined as a company’s cash from operations, less capital expenditures to maintain or expand its business. Because free cash flow is not affected by non-cash items such as depreciation that reduce a company’s earnings, it generally provides a more accurate picture of a company’s ability to sustain its dividend.

Jérome Dubreuil, an analyst with Desjardins Securities, projects that BCE will have free cash flow of $3.64 a share in 2022, which is still slightly less than the dividend. He sees BCE’s free cash flow rising to $3.98 a share in 2023, which – even with an expected dividend increase of about 5 per cent early next year – would cover the dividend, although with a higher payout ratio than BCE’s own target.

After that, however, the payout ratio should continue to decline. With BCE’s heavy capital investments in fibre-to-the-home internet now peaking, analysts see BCE’s free cash flow rising over the next few years as spending on the fibre rollout gradually slows. By 2025, analyst Drew McReynolds of RBC Dominion Securities sees BCE’s cash flow rising to $5.19 a share.

Assuming the dividend continues to grow at about 5 per cent annually – consistent with BCE’s recent history – the company would be paying about $4.26 a share in 2025. Dividing that number by projected free cash flow of $5.19 would produce a payout ratio of about 82 per cent – still on the high side but moving in the right direction.

These are just estimates, and a lot can happen between now and then. But BCE’s dividend, which yields about 5.8 per cent, is almost certainly safe and will likely continue to grow. The company has raised its dividend by at least 5 per cent for 14 consecutive years, and I don’t see that streak ending any time soon.

--John Heinzl

What’s up in the days ahead

Brenda Bouw finds out what Rob Spafford, portfolio manager at Cidel Asset Management in Toronto, has been buying and selling of late.

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

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Compiled by Globe Investor Staff

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