Just like that, we’re back to record highs. War, pricey oil, inflation, a surge in global bond yields and the latest artificial-intelligence freakout have been no match for this bulletproof stock market.
For investors, these are the best of times. The S&P/TSX Composite Index has doubled in just the past four years. It feels like everyone is making money.
Many think this is nuts. How much longer can this go on? You can’t go a week without some big name in the business calling this the mother of all stock market bubbles.
To that skepticism, the same unavoidable counterpoint keeps coming up. This is about earnings.
“For now, earnings have been growing so strongly that it’s hard to call this a bubble,” Jurrien Timmer, director of global macro at Fidelity Investments, said in a recent note. “Bubbles have been about excessive valuations and a lack of earnings growth. So far, we don’t have either.”
By some measures, in fact, this has been a surprisingly unforgiving bull market. Record highs obscure a ton of carnage beneath the surface. These are arguably the more intriguing stories in a market captivated by extraordinary success.
Major structural shifts are afoot, and the companies deemed to be on the wrong side of them have been treated ruthlessly.
The biggest one is AI, which, in case you haven’t heard, is going to change the way the world does everything, in every possible way, forever. Not the kind of trend a company wants to miss.
IBM IBM-N is a good example – a 115-year-old company reduced by one-quarter of its market value in minutes, its future clouded because it misjudged AI’s pace of change.
But then you see that IBM’s stock has quietly bounced by 15 per cent over the past two weeks. It hasn’t come close to making up for the historic loss, but if you bought the crash, you’re not regretting it.
There is a wholesale reordering taking place across the equity universe. It’s messy and overcorrections are inevitable.
That’s the reason a company like Shopify Inc. SHOP-T, which happens to be the third largest stock in Canada, can be an AI casualty one moment, and a champion the next. This year to date its share price has swung from a 44-per-cent decline to a 55-per-cent incline.
AI isn’t the only force reshaping the stock market in Canada. There are pockets of wreckage tied to rising bond yields, the breakdown of the Canada-U.S. trading relationship, the bursting of the Canadian housing bubble and the strict curbs placed on the immigration to Canada.
Investor consensus is a fast-moving thing these days, turning on companies quickly and mercilessly. Some of those moves are justified. Others are wild exaggerations.
Even with the market at record highs, there is plenty for contrarian investors to comb through. Here are a few areas of the TSX to consider:
Application software
The biggest casualties of the “SaaSpocalypse” are the U.S. software-as-a-service giants such as Salesforce Inc. CRM-N and Adobe Inc. ADBE-Q, which dropped by nearly half this year, peak to trough. But lots of smaller Canadian players have been hit by the fear that AI will render many traditional software suppliers obsolete.
Open Text Corp. OTEX-T and Docebo Inc. DCBO-T are nursing share price drawdowns of more than 35 per cent. Same goes for Constellation Software Inc. CSU-T, one of the country’s best-performing stocks until about a year ago.
The contrarian case is not hard to envision. The disruption to software stocks from AI proves not quite so extreme, paving the way for a rally.
Gold
If you consider gold to be a hedge against crisis, this year hasn’t played out to script. Even with the war in Iran and the resulting spike in oil prices, gold prices fell back by 25 per cent. It was even worse for the S&P/TSX Global Gold Index, which lost as much as 36 per cent.
The selloff seems like a natural reset from an incredible run, which arguably removed all the excess from the space. If the gold miners were once running too hot, they don’t look particularly expensive any more.
Telecoms
If you’re looking for a deeply out-of-favour pocket of the TSX, here it is. The reductions to immigration rates in Canada have proven a major headwind for the telecoms, who rely on newcomers for subscription growth.
Telus Corp. T-T is currently in investors’ crosshairs, having slashed its dividend in the wake of grim quarterly results.
But it’s possible the market is putting too much importance on a temporary policy shock, and the telecoms could regain their financial footing in relatively short order.
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