Investment Insights from TD Asset Management’s CIO, David Sykes

In 2024, North American stock indices demonstrated appealing double-digit returns for investors. Even with these substantial gains, David Sykes, the Chief Investment Officer of TD Asset Management, believes that North American markets still present enticing opportunities. As chair of the TD Wealth Asset Allocation Committee, Sykes advocates for an overweight position in equities.

Economic Outlook for the S&P/TSX Composite Index in 2025

During a recent conversation with the Globe and Mail, Sykes emphasized that projections for equity markets should not be confined to a one-year horizon. Drawing from 75 years of data, he pointed out that on average, the U.S. stock market yields a return of 9.5% annually, while the Canadian market offers around 7.7%. Highlighting the inherent variability, he noted, "Projecting any single year is challenging due to the significant fluctuation around the average."

Sykes anticipates that the economy will remain robust, bolstered by strong earnings and the expectation that peak inflation has passed. He noted, "We should see either stable levels of inflation or slight disinflation in the coming year.”

Expectations for the TSX and Market Growth Factors

While Sykes refrained from providing a specific target for the S&P/TSX Composite Index, he expressed confidence in solid earnings growth, projecting an increase of approximately 10%. Given that the Canadian market is trading at about 16 times forward earnings with a nearly 3% dividend yield, these indicators suggest an appealing investment environment.

He attributes part of the expected growth to the Canadian financial sector, stating, "We believe we’ve already experienced the worst of the loan losses," and has a positive inclination for energy stocks due to the strong cash flow these companies are generating.

Comparison of TSX and S&P 500 Returns

When asked about return expectations for the S&P 500 compared to the TSX Composite Index, Sykes affirmed a more optimistic outlook for the U.S. market. He cited anticipated earnings growth of around 15% for the S&P 500, emphasizing the disparity in performance between the top seven tech giants versus the rest of the market.

"In the U.S., technology remains a strong driver for earnings," he noted, as these companies continue to post robust financial results.

Potential Market Risks

Regarding risks that could undermine stock market momentum in both Canada and the U.S., Sykes explained that, rather than dwindling earnings growth, a significant concerns lies in shifts within the rates market. Recent trends have shown a notable rise in yields. Sykes warned, "If rates continue to climb beyond the 4.75% to 5% range, it could shake up our asset allocation strategy."

Sector Performance: Winners and Losers

Looking domestically, Sykes highlighted that financials, including banks and energy companies, are likely to perform well in 2025, while competition in the Canadian telecommunications sector may hinder growth.

In the U.S., Sykes projects financials and industrials will thrive, particularly with expected deregulation and advancements in sectors like artificial intelligence. Conversely, he expressed concern for consumer staples and apparel, which may struggle amidst evolving consumer habits.

Thoughts on Quantum Computing Stocks

Sykes acknowledged the buzz around quantum computing and artificial intelligence but urged caution regarding their implementation timelines. "We should ensure that any investments we consider come from companies with solid business models and competitive advantages," he advised.

The Outlook for Domestic Government Bonds and Corporate Bonds

Sykes maintains a neutral stance on domestic government bonds, predicting returns aligned with current yields. However, he sees potential in investment-grade corporate bonds, especially given the favorable yields compared to government securities.

Consensus Within the TD Wealth Asset Allocation Committee

Among the TD Wealth committee, there’s consensus on the U.S.’s pro-business trajectory, contrasting with more cautious views on Europe and China. However, debate persists over inflation trends and their potential impact on interest rates, a focal point of discussion as economic policies evolve.

Long-Term Investment Themes

When asked about areas for long-term investment, Sykes pointed to themes such as artificial intelligence, robotics, and health and wellness. "Identifying strong companies within these growth areas is key to ensuring consistent compound returns," he noted.

Conclusion: The Year of the Great Rotation

Looking forward, Sykes suggested that 2025 may be characterized by a "great rotation" where many companies outside of the famed “Magnificent Seven” will begin to shine as pro-business policies take hold. He believes that, while substantial fluctuations exist, careful attention to quality investments and diversification will lead to successful, consistent returns over time.

In summary, Sykes’ insights underscore the importance of a long-term perspective, strong fundamentals, and careful analysis in navigating today’s dynamic investment landscape.