These reasons to expect a bull market are noteworthy

Market Strategist Scott Barlow offers thoughts on the research, analysis and ephemera that’s crossed his desk this week.

1. Wells Fargo’s “AI in Action” report helped flesh out the diversity of use cases for artificial intelligence and the speed at which AI is being adopted. Equity analyst Christopher Harvey notes that Visa has been using artificial intelligence to detect fraudulent transactions, Best Buy uses AI to make customer service more personal, while Ralph Lauren is modelling pricing and demand with AI. Kraft Heinz partnered with Microsoft’s AI functionality to increase revenue by US$30-million through improved sales and supply chain efficiency. Mr. Harvey sees the winners from AI as being relatively obvious because of the massive scale required to make AI work. He lists Apple Inc. AAPL-Q, Advanced Micro Devices Inc. AMD-NE, Amazon.com Inc. AMZN-Q, Alphabet Inc. GOOG-Q, IBM Corp. IBM-N, Microsoft Co. MSFT-Q, Nvidia Corp. NVDA-Q and Oracle Corp ORCL-N.
2. An in-depth report from Scotiabank strategists and real estate analysts concludes that, with the commercial real estate situation worsening, particularly office real estate, the domestic banks are largely safe from major harm. Recent data suggest that high vacancy rates have pushed domestic office building values lower by 30 per cent in Canada, and U.S. office values lower by between 30 per cent and 50 per cent. Canadian bank loan books have commercial real estate exposure of 10 per cent to 13 per cent of total loans. For office loans specifically, the number is much smaller at between 1 per cent to 2 per cent. Office exposure is unlikely to dent bank balance sheets but the report warns that “the potential for losses to materially impact earnings in any given quarter is real.”
3. Although Scotiabank’s view is that the major banks will be able to shake off weakness in the office sector, analyst Meny Grauman also believes it is too early to get fully bullish on the banks. In a subsequent report, Mr. Grauman noted that sector earnings expectations for fiscal years 2023 and 2024 were revised lower by 3 per cent and 2 per cent, respectively. The analyst believes the credit cycle downturn has only just begun and banks’ rising provisions for loan losses will depress profit growth from here. Mr. Grauman recommends life insurance companies instead of bank stocks for new money or, for those compelled to invest in banks stocks, he recommends TD Bank TD-T because of what he describes as a “fortress” – or well-capitalized – balance sheet.
4. One of BofA Securities’ most effective market signals, the sell-side indicator (SSI), is approaching a “buy” signal for the first time in six years. The SSI tracks the equity allocation recommended by Wall Street strategists as a contrary indicator – the higher the average equity allocation, the worse equity performance tends to be in the aftermath. The current SSI reading implies 16-per-cent upside for U.S stocks in the next 12 months. Historically, when the SSI was as low or lower than it is now, 12-month returns were positive 94 per cent of the time, with a median appreciation of 21 per cent.
5. Morgan Stanley chief U.S. equity strategist Michael Wilson has been (wrongly) bearish this year in expectation of an earnings slowdown and he remains so in the short term. For 2024, he sees seven reasons to expect a secular bull market. These are postinflation monetary loosening, strong consumer balance sheets, rising productivity, industrial automation, operating leverage and profit margin expansion, clean technology and a shortage of U.S. housing supply.
6. The S&P 500′s 10-per-cent year-to-date market rally has been narrow – driven by a very few mega-cap stocks – to a record extent. Scotiabank strategist Hugo Ste-Marie notes that the S&P 500 equal weighted index, measuring the return of the average stock in the index, has underperformed the conventional market capitalization weighted benchmark by a record 9.9 percentage points over the past 13 weeks. Narrow market rallies are usually considered fragile and temporary. Mr. Ste-Marie, however, while expecting some reversion to the mean in the short term, sees the possibility that the large-cap tech stocks that are currently leading the market will continue doing so. This potential trend, which would likely be likely motivated by the scramble to implement artificial intelligence, would mirror the period between 1998 and early 2000, just prior to the technology market implosion.