Gordon Reid, president and chief executive officer, Goodreid Investment Counsel

FOCUS: U.S. equities

MARKET OUTLOOK:

Market sentiment is improving and with it, U.S. equity prices are rising. But stepping back, not much is changing with respect to the fundamental backdrop. The U.S. Federal Reserve is taking a tough (and appropriate) stand on inflation. Interest rate increases are still in the early stages. Inflation has predictably come off the boil, with commodity prices falling in a meaningful way and demand beginning to weaken as consumers worry about their future.

Time is the friend of equity investors. As more is known and authorities follow through on tough monetary measures, the end of a real or imagined recession will be visible, allowing for confidence to re-emerge on the economic front. In the meantime, corporate earnings are holding up surprisingly well. Specific sectors have been weak (select retailers like Target and Walmart, and semiconductor companies). Other areas such as health care, travel-related companies and domestic industrials have been strong.

A common concern heard throughout corporate America is the strength of the U.S. dollar, which puts pressure on international operations. Having managed through multiple cycles, we view this as a minor issue that often reverses in future quarters.

Our conclusion of the current state of equity markets is that they are fragile, moving on sentiment more than fundamentals and therefore susceptible to a retracement of the recent advance. That said, long-term structural conditions are in place to support a meaningful advance of the economy and equity market in the next cycle.

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TOP PICKS:

Bank of America (BAC NYSE)

As rate hikes continue, BAC’s sensitivity to higher interest rates put it at the centre of investment discussions. A bullish thesis calls for the Fed to continue its tightening monetary policy but not to the point of killing the strong economy. Current pricing reflects the likelihood of a meaningful recession and a damping of business activity. Risk and reward is favourably skewed.

Honeywell (HON NASD)

HON is the ultimate defensive holding with a growth kicker. Its A+ balance sheet, two per cent dividend yield and highly predictable earnings trajectory make this a comfortable holding. Its aerospace division, which comprises a third of the company, is poised to grow briskly in the next few years. With a compelling valuation of less than 20x earnings, this issue offers much promise.

Lear (LEA NYSE)

Lear Corp. has been under pressure since the onset of COVID-19 due primarily to softness in production units. As supply disruptions are tempered and more normal volume levels return, look for profitability to rise sharply.