Mike Vinokur, portfolio manager at MV Wealth Partners with iA Private Wealth

FOCUS: North American large caps 

MARKET OUTLOOK:

The first quarter saw very strong equity market performance based on the market’s belief that central banks would aggressively reduce interest rates this year and strong nominal earnings growth would continue. At the start of the year, market participants thought three to six cuts would be implemented by the U.S. Federal Reserve. The narrative has definitely changed due to stickier inflation and a still robust jobs market. Government spending has provided a big boost to gross domestic product (GDP), though most recently we are seeing spending patterns shift as consumers pullback on discretionary spending. 

Furthermore, the U.S. savings rate for March 2024 was reported at 3.2 per cent, which is much lower than February’s 3.6 per cent, January’s 4.1 per cent and the 2023 average at over five per cent. The last time the savings rate was close to three per cent and trending negatively was in 2005-07. According to FactSet, as of May 3, the S&P 500 Index was trading at a one year forward multiple of 19.9 higher than the 10-year average of 17.8. While we are not predicting a recession just yet, we do believe that markets have gotten ahead of themselves in terms of valuation.

We would not be surprised to see the S&P 500 correct to the 4,600 to 4,800 level on fears of lower earnings growth, a geopolitical event or the seasonality of the market (sell in May and go away). We have been raising cash as of late and now sport close to 20 per cent in our equity model portfolios.

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TOP PICKS:

Johnson and Johnson (JNJ NYSE)

 JNJ has a stable of innovative medicine and med-tech products. Now that the talc powder fiasco seems to have found a resolution for the most part and the total liability number may in fact come in less than what the company has already put into its reserves, future earnings prints should be cleaner. The company has reaffirmed guidance of $10.50 earnings per share (EPS) for 2024, which is less than 14 times earnings and a greater than three per cent yield. We like the stability of the business and the deep pipeline of new products in development.

 Rogers Communications (RCI.B TSX)

 Rogers Communications: anything interest rate sensitive like telecoms and utilities has been hit hard over the last year, however, we believe Rogers Communications is a compelling opportunity at this valuation. Rogers operates coast-to-coast within an oligopoly. With the acquisition of Shaw and annualized savings achieved one year earlier than expected, it has become Canada’s leading wireless carrier and cable provider. Based on the company’s guidance for 2024, the stock trades at less than 10 times FCF and a dividend yield of 3.71 per cent. We believe there will be room for a meaningful dividend increase by the end of this year once they de-lever the balance a little more, perhaps by the end of this year or early next.

Fedex (FDX NYSE)

 The company has gone through a major cost reduction initiative- drive initiative- which is expected to save $4 billion by 2025 and $6 billion by 2027. The company is a premier operator in the delivery and logistics business worldwide. It has guided to $17.25 or better per share in fiscal 2024. We believe earnings could grow to greater than $25 per share over the next 18 months based on further cost savings and further share repurchases already approved by the board. Currently, the stock trades for just over 10 times our estimate of earnings yields almost two per cent.