This Market Factors starts with a global stock screen that uncovers three promising Canadian stocks and moves on to an important ratio that might presage, at long last, a prolonged value market. The diversion has Shane MacGowan in it and there’s quick hits as always.
Equities
‘Global Steady Compounders’ includes three domestic stocks
Prominent BofA Securities quantitative strategist Nigel Tupper believes that recent market volatility has obscured a global profit outlook that is extraordinarily bullish and broader than most investors believe. New sectors - and in one case a surprising one - were the top performers in August.
Mr. Tupper recommends what he calls “Global Steady Compounders”, the result of a stock screen that includes three Canadian companies.
Earnings momentum is a critical driver of equity returns. Mr. Tupper reports that the global earnings revision ratio, the number of companies increasing earnings forecasts divided by the number lowering estimates, is well into positive territory at 1.35, a five-year high. The revisions ratio is above 1.0 in all global regions.
The strategist reports a re-shuffling of market leadership within the AI investing theme. Previously, bouts of volatility ended with semiconductor stocks leading the way higher.
This time, however, software stocks are spearheading the recovery. Global software stocks are higher by 22 per cent in the past month and 32 per cent in the past three months. Data centre-related stocks are lower by 1.4 per cent in the past month and down 2.0 per cent in the past three months.
Cybersecurity companies are also strong, up 4.5 per cent in the past 30 days and 7.0 per cent in the past three months.
Mr. Tupper made specific reference to alcoholic beverage stock strength month to date. This is a surprise in light of Gen Z’s lower alcohol consumption, even if recent data suggests a small increase. In terms of Mr. Tupper’s triple momentum model - a combination of price, earnings and news flow momentum - the alcohol sector is second from the bottom.
BofA is recommending stocks from a Global Steady Compounders stock screen. These are companies with consistent profit, earnings estimates, and stock price growth over the past decade.
Mr. Tupper listed three Canadians stocks among the top 50 global compounders: Toromont Industries (TIH-T), Franco-Nevada (FNV-T) and Constellation Software (CSU-T). U.S. stocks on the list potentially of interest to Canadian investors include Costco Wholesale (COST-Q), Mastercard (MA-N), Visa (V-N), Eli Lilly & Co. (LLY-N), Cummins (CMI-N), Analog Devices (ADI-Q), Cadence Design Systems (CDNS-Q), Microsoft (MSFT-Q), and Jabil (JBL-N).
Investing styles
Value watershed
Scotiabank strategist Hugo Ste-Marie sees a potential inflection point in U.S. market returns - a return to consistent value stock outperformance.
Mr. Ste-Marie uses the relative performance of the Russell 1000 Growth iShares ETF and the Russell 1000 Value iShares ETF (dividing the price of the former by the latter) to gauge which strategy is performing best. After a three year period of growth stock outperformance ending in October 2025, value stocks have been outperforming by a significant margin.
The ratio is at the important level of 0.47. Mr. Ste-Marie notes that a move below this number has historically heralded a prolonged period of U.S. value stock outperformance. Sectors gaining favour if this was the case would include financials, industrials and other economically sensitive groups.
Mr. Ste-Marie reassured clients that a value takeover would not necessarily presage weak returns for the S&P 500. I would add the caveat that underperformance of the growth companies that currently dominate the benchmark - like Microsoft, Apple, Nvidia, Meta Platforms, Amazon.com - would cause considerable index price volatility, at least initially.
Predicting the extent to which this trend is adopted by the TSX is not straightforward, as it has been precious metals companies, which are neither growth nor cyclical stocks, that have been performing best the past three months. Energy stocks, an avowedly cyclical sector, performed well over the past month but because of geopolitical reasons, not cyclical ones. Banks are already performing well and the future of industrial stocks are held hostage by White House trade policy.
Shane MacGowan poses for photographers upon arrival at the Shane MacGowan, The Eternal Buzz & The Crock of Gold, event in London in 2022.Scott Garfitt/The Canadian Press
Diversions
Any concert, any time
U2 is about to release a single from their upcoming tribute album for Shane MacGowan, late front man for The Pogues and I am interested in this for non-obvious reasons. My love for U2 has been fading since Unforgettable Fire, with a brief bump higher on the release of the Elevation album, but The Pogues still sound tremendous to me.
The release of the single reminds me of a question I used to bat around with friends. Namely, if you could see any concert, in any year, who would it be?
For the longest time my answer was The Who in ’66 or ’67, when their big hits were Can’t Explain, My Generation, Magic Bus, Substitute and Kids are Alright. (As an aside, Pete Townsend initially didn’t want to release Magic Bus because it was too much of a Bo Diddley ripoff. You can’t unhear this once you notice). The energy, with the full assault from insane drummer Keith Moon, would have been incredible.
I changed my mind about the perfect concert, though - to The Pogues in 1986 in a small Irish venue. If I had stood (or more likely bounced) 20 feet from Shane MacGowan and his horrible teeth while the band played If I Should Fall From Grace With God I would have no doubt lost my mind.
Mr. MacGowan’s passing was sad but no surprise. He famously took zero care of his physical wellbeing, took every drug available including oceans of alcohol, and mostly looked like he smelled like an open sewer. When asked about improving self care, he answered: “You don’t join a band to drink milk.” I can’t think of a better epitaph.
The essentials
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Globe Investor highlights
Once a perennial underperformer, Scotiabank stock is making a comeback, notes David Berman
Tom Bradley on the six signs that a stock market bubble is ready to burst
Sandy Liang of Purpose Investments says index ETFs have a big drawback when it comes to bond weightings - and it’s getting worse
Quick hits
U.S. dollar volatility has boosted gold buying and, with a delay, also digital assets. ETFs are the primary demand source for cryptocurrencies. Digital asset company CEOs recently met with the White House, which wasn’t publicized much as far as I saw, and there’s a pivotal Senate meeting in mid-September that will determine oversight for digital assets.
I don’t want to out anyone with this but I just saw a research report from a major domestic company comparing the performance of the TSX and the S&P 500 without adjusting the currency. I hate this. The difference between the TSX’s non-currency adjusted outperformance in total return and currency-adjusted over the past 18 months is five percentage points, a huge margin for a short time frame.
Read this week’s earnings and economic calendar here