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BMO chief investment strategist Brian Belski has previously touted Canadian stocks for their cash flow potential but the TSX significantly underperformed the technology-heavy S&P 500 during May. Domestic equities will continue to struggle as long as the three largest sectors – financials, energy and materials – all underperform.

The S&P/TSX Composite lost 5.2 per cent last month, trailing the S&P 500′s 0.25 per cent appreciation. The domestic technology sector was the only group with positive performance at 10.1 per cent. This only partially offset the 5.4 per cent decline for financials, the 8.4 per cent drop for energy stocks and the 10.7 per cent loss for materials companies.

Mr. Belski reports that TSX earnings are running 3 per cent below his forecasts. He is expecting profit growth to stabilize in the latter half of the year but admits the risks are skewed to the downside. Investors should expect significant volatility in the event the financials and resource sectors, which account for 59 per cent of the benchmark, continue to see downwards earnings revisions.

Technology stock performance and global economic growth will drive the relative performance of domestic and U.S. stocks in the months ahead. Technology forms 27 per cent of the S&P 500 but only about 7.0 per cent of the TSX, so the domestic benchmark will underperform for as long as tech leads the market.

A disappointing economic recovery in China has significantly depressed commodity prices, particularly metals. A stronger expansion, and better global growth generally, would better support commodity prices and the relative returns from Canadian stocks.

– Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

A decision by Saudi Arabia to cut oil production makes these energy stocks worth considering. While consumers may experience elevated prices in the second half of the year, energy producers could benefit from higher prices and a strengthening export market.

The Rundown

Preet Banerjee challenges the notion that a ban on embedded commissions would create an “advice gap” for non-wealthy Canadians.

Scott Barlow offers insights into why we might be headed for a bull market, the challenges facing commercial real estate and the painfully obvious companies that might benefit from the AI revolution.

The Canadian dollar is set to rally over the next 12 months as the Bank of Canada resumes rate hikes, the Canadian Press reports.

Others (for subscribers)

Wednesday’s analyst upgrades and downgrades

CIBC’s analyst’s top bank stock picks after a disappointing earnings season

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Ask Globe Investor

Question: Is it riskier to build a portfolio of royalty trusts, as opposed to dividend stocks? Why? – Filipe W.

Answer: It’s very difficult to build a diversified portfolio of royalty trusts, simply because there are very few of them. We have only a couple on my newsletter recommended lists: The Keg Royalties Income Fund (KEG.UN-T) and Richards Packaging Income Fund (RPI.UN-T).

Some mining companies use a royalties business model to generate income – Franco-Nevada (FNV-T) is an example) – but they are set up as corporations, not trusts.

Unless you want to include REITs (which really are not royalty trusts), there’s not much to choose from.

So, your question should really be: “Is it possible to build a diversified portfolio of royalty trusts?” The answer is no. – Gordon Pape

What’s up in the days ahead

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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