Is the Year-End Rally Just Getting Started?

Transcript:

Welcome to Barometer Readings this December 2nd 2025. Still Dave is traveling so I’m pleased to take his place and MC this weekly webcast. With me is Amit Joshi, one of our portfolio managers. And I invited it because it is very timely to have him speak to us as it is Canadian bank earning season. Bank of Nova Scotia just reported today a good quarter and all the banks have traded up today. And we have been overweight financials all year. So I’ve asked Amit to join us and give us a quick overview about the banks, the wise and the differential metrics and why we like them. So on behalf of both of us, thank you for joining us today. My name is Diana Avigdor and I manage Barometer’s multiasset trading desk. My focus is short-term. That means I watch the temperature of the market day in and day out. And my purpose is to of course find good prices to enter and exit our positions. But importantly to give our guys market intelligence and make sure they don’t miss important headlines and market developments as they have their head down in some research report or are traveling for a conference. So to update them regarding what seems to matter to most players in real time in the market.

So I thought I would do the same for you. I’m following what I do on a daily basis and bring you into what I have seen over the last couple of weeks that I think were relevant to the market. I have compiled interesting charts as I have seen over this period, and I will share with you a hodgepodge of information that I think matters to the market over the recent couple of weeks. As I usually do when I sit in for Dave, these are charts that come through my desk that I found most relevant and interesting. And I share with you what we are seeing and what I feel matters or mattered over the past little while.

So over the last couple of weeks, and David has been talking about this a while, markets have been pretty volatile. We sold off. Breath has been weak and weakening over the last couple of months. And then last week’s performance seemingly repaired itself. Well, not fully repaired. Brethren is still not where we want it to be. And therefore we are still holding higher than usual cash which we have perhaps for maybe a month now. Now we have less than 20 more trading days before the year is over. I know a lot of people in the media will talk about whether we will or will not have a Christmas rally, but that’s like talking about whether we’ll have a black or white Christmas. We just don’t know. But usually it’s a white Christmas, so context matters. We have snow outside right now, so it follows likely that we have a white Christmas, but we’ll see. Same in the market. Things are okay. Trends have repaired, so it’s likely we’re okay into year end. But markets don’t know it’s December 31st and that that’s very important. But what happens over the course of this month is that a lot of people are out and liquidity dries out especially towards the last half of the month which is in two weeks and liquidity driven volatility would not be out of the question. So that’s the setup. If you’re a short-term trader, you might look to trade this volatility within the trend, but if you’re a long-term holder, you might want to take your eye off. From our perspective, of course, we don’t take our eye off. What we do is make sure that volatility doesn’t eat into returns and for now staying with some elevated cash.

So, let’s look at some pictures around different subjects that came across my desk the last couple of weeks that I thought were interesting or telling. I want to start with the S&P over the last two weeks. This is the chart of the S&P over the last two weeks. And if you took your eye off the market, you would say nothing happened. But we had a decent sell-off and then quite a volatile comeback. So that’s a lot of volatility and we’re going to go through the wise.

This next chart is showing you an uptick in correlations. Correlations, what they mean is when all stocks move together. When it’s down here, it means it’s idiosyncratic, which tends to happen during earning season, which we just came out of. And now it’s kind of moved up as market sold off a couple of weeks ago and then came back last week. All stocks kind of like a herd move down together and up together. Employment angst over November and no macro data due to government closures in the US to either confirm or deny that angst and with rate expectations moving up and down in a very volatile fashion. These were the reasons for the volatility. Earnings had nothing to do with it. And yes, NVDA reported stellar earnings and got taken down with the market angst at negative flows on the day after and a general deleveraging and P&L protection. That is performance protection into year end. So no one wants to give up a good year. From our perspective, we’re sitting with around 20 percent cash depending on what product you are in and what your risk tolerances are. Some cases higher, some cases lower, but definitely can’t say that any one product is fully invested at this point.

So, what else bugged the market? This is a chart of Japanese interest rates and moved up substantially over the last few years. This is a chart since 2021 to today. Now, it’s true that all interest rates have moved up substantially over the last few years, but there has been a very popular trade in the market called the carry trade. And what that trade is is to borrow yen at zero rates and buy dollars and dollar assets that pay higher rates. So with Japanese rates poised to continue to rise at a time that the rest of the world is moving lower after a historically quick rate height regimen means that this trade is now definitely less attractive and at the minimum sucks dollars out of the US dollar and US dollar denominated assets as investment funds repatriate back home. So perhaps this will play into the world markets finally catching up to the US in performance. For so long, US was the only game in town. And over the last couple of weeks, there’s been some angst in that part of the world and in that asset class.

Another thing that coincided with the market starting to stagnate and Brett starting to deteriorate was the fixed income market giving off some warning signs. This is a chart of subprime loan delinquencies. You’ll see it kind of moving up here up and to the right. And they have shifted up. So whether it’s auto loans or student loans, they inched higher. And this comes at a time when the hyperscalers, those mag 7s, started to announce circular deals and raising debt. And we talked about this in past webcasts and I’m sure you hear it all over the business news. The market stopped and took a bit of profit in order not to lose the wonderful year everybody had. So might I add, wonderful year globally really.

And then there is the office the poor office. This is a chart of office commercial backed securities. Co changed the way we work. I do believe there is something to this and that this is here to stay. Working life has changed for many of us and managers know this well cuz nobody calls in sick anymore. But work from home or hybrid has changed the nature of work and the location of work and offices feel it.

But as I said earlier in my introduction, the weakness in the market was definitely not earnings. This is a table delineating this last quarter’s earnings growth by sector. So earnings growth in aggregate, it’s right here, has been posted at 14.7 percent. This is for the recent quarter that just ended. In the US, Canada still has their banks reporting which is a big component of our market. There’s no final numbers there, but things have been okay in Canada as well. And sales growth has come in at 8.2 percent. This tells you something about margins. They expanded, they’re good. How companies figure things out despite tariffs as a moving target. Sometimes they’re higher, sometimes they’re lower depending on how things wake up in the morning. Is the productivity gains due to AI perhaps? Is this the reason the labor market in the US is exhibiting some softness? If so, it comes at a great time because really by all historical measures the US employment market is at full employment.

On productivity gains, however, I thought I’d share this little headline I heard on CNBC with you just for fun. An MIT study released found that AI is already capable of replacing 11.7 percent of the US labor market. And by the way, there is early research that AI is already causing a productivity surge in key fields including scientific and medical research. So that’s that’s not bad. One of the Wall Street Journal’s journalists, Greg Ap, wrote that AI has created a lot more fear and worry than previous major areas of innovation. He called it the most joyless tech revolution ever. Lots of anxiety around this. And Federal Reserve Chair U, Pet, Philip Jefferson said in a speech last month that by automating certain tasks, AI could lead to a reduction in some types of jobs. But increased productivity leads to economic growth which may create new employment opportunities. So lots of moving parts. But bottom line earnings have been very good.

The chart in front of you now shows the annual realized and bottomup consensus EPS growth estimates for the various mostly watch indices like S&P, NASDAQ and Russell. You will note this big bar on the right is annual realized and bottom up EPS consensus growth estimates for the Russell actually. So it is interesting to see that despite the fact that breadth has been deteriorating over the past quarter, earnings breadth, if that is such a thing, has been expanding. We can see that Russell 2000 has an amazing growth trajectory for earnings expectations, even better than the NASDAQ 100 or the S&P 500.

So why was the market so sloppy? It wasn’t earnings. It wasn’t earnings growth. Then what? The chart in front of you shows the market in the white line. This is rebounding strongly when the blue line took off. The blue line is the chance of a December Fed funds rate cut. This is what the market wanted to see. The market wanted to see the probability of a rate cut firmly on the table. I will show you why soon.

A lot of people talk about valuations. Is an NVDA the most expensive company ever? No, it isn’t. This chart is the valuation of NVDA after the earnings. If the company meets their guidance, its forward PE falls to 28 times. That’s not crazy for a high growth company. We own it, but rest assured that as our strategy usually is. We will hold it for as long as it works and doesn’t break major technical levels or until there is a better alternative if it starts losing relative strength. But it’s not the pees of who you might think naturally it is.

Moving on to macro and this will explain the rate cut tantrum. The chart in front of you is a year-over-year change in employment and select sectors. These are the sectors that give some feel to the heart of the economy. So things like transportation and warehousing, manufacturing and we heard of layoffs over the month of November. But really in the US we are pretty much at full employment and in Canada it is moving in the right direction and it’s not a new phenomenon. There has been softness in these sectors for a few years now even during the Biden administration. But the marginal softness meant that as the market was getting less indication that rates were going to be cut, the more it got worried because of this. And I have a stunning stat. Bloomberg flagged two sectors, healthcare and social assistance and leisure and hospitality and said they accounted for more than 100 percent of net job gains so far in 25 in the US. That’s means everything else was down. Vacations are getting more and more expensive truly.

And then the number of people unemployed for at least 27 weeks or more has been inching up as well. So that further making the case that rates should be cut. And again why the market didn’t like it when it looked like it wasn’t going to happen.

And this is a chart of the purchasing managers index that came out yesterday. The yellow, if you can see that, it’s a little faint, but if you can see that the top one is the pricing component. So pricing is coming down but it’s still elevated but all the rest of the components namely the manufacturing ones are low and sub50 which is in contraction territory further making the case of rate cut more obvious and why the market really didn’t love it when it didn’t sound like it was going to do it. The expectations are now almost at 100 percent and this is coming next week. And so just to show just as the market was getting the message from all the speakers on the speaking circuit that it’s likely that the rates will be cut in the US next week, market began to repair and gave us this kind of breadth thrust as it was repairing and you know like I showed you in the first picture over two weeks the S&P 500 is really quite flat.

I took this chart out of Goldman Sachs trading desk and in it they delineate in percentages how much percent of their total annual turnover trading that’s all their clients and corporate buybacks and December is 7 percent of their total trading all these numbers add up to 100. So December market liquidity and activity while not the highest is still decent. So there’s some business still to do. This includes the corporate buyback desk which is very very busy. And one of the themes this year has been retail and they’re very very big participation. Now Goldman has a lot of less retail exposure than say Maril Lynch, but they are trading counterparties to large corporations that hold retail money through mutual funds or ETFs. So those count as well.

This is a chart of the US median household income pivoting back to macro adjusted for inflation. Which I mean it just shows how much richer the American citizen has become since 1990 despite what everyone will tell you. Can it continue or should we adjust and be a little forward looking towards another inflationary surge. We are actually managing for that. We think that there’s a high possibility that we do get a higher inflationary surge unless we robotics or AI adjust for productivity and actually lowest prices but we’ll see that’ll take some time to play out. The enormous budget deficits everywhere are not helping the inflation story so we are mindful of this and are managing for this for inflation protection in our portfolios. And so this is the 2-year chart on the S&P has seen quite a rebound. We have also seen a rebound in the breadth indicators, but they are not strong enough yet for us to invest all of our capital. We know December can be erratic, so unless conditions change substantially, we plan to hold on to a portion of our cash. Callum Thomas from Top Down Charts also reminds us to be careful, as the market has rallied for seven consecutive months, and history shows that can often be enough. Markets tend to consolidate after long stretches of strength, which is another reason we prefer to maintain some cash.

I mentioned that I would show you a series of charts that crossed my desk, and this one stood out. I saw it from Macro Compass and thought it was worth sharing because it reflects a global theme. It highlights the fiscal spending that has occurred and is projected to occur in Germany as an example. The point is that fiscal spending globally is on the rise. Monetary conditions, while a little tight in the US, are loosening almost everywhere else except Japan. Quantitative tightening is likely to shift toward quantitative easing again.

We continue to recommend diversifying portfolios outside the US. This does not mean reducing US exposure to zero, but rather adjusting a 60/40 US–Canada or 70/30 mix by shifting some US weight into global positions. This is why we launched this product, giving clients access to the asset allocation we are recommending across markets including Canada and Europe. These markets, such as Germany and the broader Eurozone, are trading at 52-week highs after years of underperformance relative to the US. We believe the value factor will continue to provide support.

To illustrate this, the table shows performance from the last cycle when value leadership was strong. Gold is the best performing asset class this year and has supported the TSX in reaching a 52-week high. In the last value cycle, copper rose 94 percent, silver 98 percent, Canada 45 percent, and Mexico 103 percent. The point is that we maintain exposure to a portfolio that balances inflation protection with growth.

My final point on what influenced markets last week relates to the strength of the consumer. Black Friday and Cyber Monday were major drivers, and many promotions have extended into Cyber Week. Shoppers continue to spend. Adobe Analytics reported a record 11.88 billion dollars, up 9 percent from last year. Part of that increase reflects higher prices, but part reflects genuine organic demand. Online spending has doubled, and while only 17 percent of online shopping occurred on mobile devices in 2015, that figure is now 57 percent. Some shoppers are also turning to AI for assistance, with AI-aided shopping up 800 percent year over year.

There was good news and bad news for markets. The good news is that spending, earnings, liquidity, and both monetary and fiscal impulses are supportive. The sensitive areas are macro data and rates. These have softened slightly but are not weak. Canada’s employment data is improving, and Canadian GDP released last Friday was acceptable. As a result, we remain somewhat defensive and continue to manage for a potential second inflation surge. We prefer dividend protection, dividend growth, and a value tilt, while maintaining some US growth exposure such as NVDA, along with a meaningful cash allocation.

Here is a look at our portfolios, which we share in every webcast to show month-over-month changes and our positioning relative to indices. We hold around 20 percent cash depending on the mandate, making it our second largest sector exposure. As a result, you will see current sector weights lower than last month in most areas except healthcare, which is a small allocation. Our largest weight remains financials at 17 percent, with materials also overweight.

This is a natural point to transition to Amit Joshi, Portfolio Manager, to discuss this positioning and focus specifically on the Canadian financials, which are now in play as they report earnings. Amit, thank you for joining me. I know you have excellent charts to share, and I will be happy to roll them. Over to you.

“Thanks so much, Diana. If you could go to the first chart. As you said, Scotiabank kicked off Canadian earnings this morning. We have a busy slate ahead, with RY and NA reporting tomorrow, followed by TD, BMO, and CM on Thursday. With earnings front and center, this is a great time to revisit our thesis on the Canadian banks, why we like them, and what makes them unique compared to their North American and international counterparts.

Our colleagues at Raymond James recently launched coverage on the Canadian banks and included charts that highlight several structural advantages the Canadian banks have over peers. Canada has far less banking competition than the US. The regulatory environment is simpler. The banks provide comprehensive financial services to clients, resulting in well-diversified revenue and earnings streams.

The next chart illustrates this clearly. In the US, there are 13.2 banks per million people when counting the big four and the regional banks. In Canada, there are fewer than two banks per million people. Market share reflects this. The big six Canadian banks control about 95 percent of the domestic market, while the US big four hold only about 43 percent. This gives Canadian banks a scale advantage and supports higher return on equity.”

He continued with an analysis of diversification trends since 1990, noting that interest income once represented nearly 70 percent of bank earnings, compared to roughly 50 percent today. Fee-based lines such as wealth management and capital markets have grown meaningfully and provide stability. Canadian banks also consistently rank near the top globally in return on equity.

Amit then reviewed expectations for this quarter. Key areas are EPS growth, capital ratios, operating leverage, and valuation relative to historical averages. Canadian banks typically trade at a premium to international peers, justified by lower earnings volatility, diversified income streams, and higher ROE. For this quarter, double-digit EPS growth year over year is expected. Operating leverage should be positive, capital positions strong, and the banks continue to buy back shares and raise dividends, supporting total return across our income and balanced mandates.

Regarding BNS, Amit noted that they delivered a strong EPS beat with solid results across most business lines. Canadian banking was especially strong. International banking was slightly weaker but improving. Provisions for credit losses were modestly above consensus but still manageable. Capital markets results were strong. Their positive operating leverage was a highlight.

Through our portfolios, we hold RY, NA, and CM, so the strong showing from BNS provides encouraging readthroughs for the rest of the big six. CM benefits most due to its higher weighting toward Canadian banking. Strong capital markets results bode well for RY and NA.

Technicals also remain strong. Canadian banks continue to trade close to 52-week highs. As always, we will let fundamentals and technicals guide our decisions. Guidance for next year will be important. One positive note from BNS is that even after a strong year, management signaled that they expect double-digit earnings growth again next year.

Thank you very much, Amit. It is remarkable that Canada has been waiting for a recession for nearly three years, leading many banks to stockpile reserves, which they can now deploy to buy back shares and increase dividends significantly. This has been a theme across the market and in our portfolios. If I think of names such as IMO, Imperial Oil, performance has been strong even with oil at 58. These are companies that are fiscally responsible, well balanced, and well capitalized, and the market has rewarded that discipline.

Thank you, Amit, for your insights. Fingers crossed for the remainder of Canadian bank earnings this week. Thank you to our clients for trusting us with your capital. We greatly appreciate the confidence you place in us. For any questions, concerns, or discussion topics, please reach out to your Barometer contact or leave us a message on our website at www.barometercap.ca.

Enjoy the rest of your afternoon and evening.