Market Rally Signals Durability, Expert Says

North American Equities Driven by Broad Strength Amidst Easing Uncertainty

Economic forecasts are brightening as key fiscal and trade issues see resolution, bolstering North American equity markets. A seasoned investment chief highlights broad-based strength as a positive sign for sustained growth.

Positive Macroeconomic Shift Fuels Market Gains

The U.S. administration’s recent budget passage, extending tax cuts and enacting deficit spending, is expected to support economic expansion. Additionally, trade agreements are being reached with several nations, although crucial partners like Canada and the EU are still in discussions. This reduction in macroeconomic uncertainty is creating a “rising tide that lifts all boats,” propelling both the S&P TSX Composite and S&P 500 indices to record highs.

The strength is particularly encouraging as it is broad-based, with most stocks and sectors showing gains. Notably, equal-weighted indices are outperforming their market capitalization-weighted counterparts, a trend that **Brian Madden**, Chief Investment Officer at First Avenue Investment Counsel, views as a marker of stable and durable market rallies.

Madden’s team is actively exploring new investment prospects in technology, energy, and aerospace and defense sectors. Their ongoing review of existing holdings shows positive early results, with seven out of 46 reported second-quarter earnings exceeding forecasts, and five of those stocks seeing price appreciation post-announcement.

Top Picks: Telus, Nutrien, and Arista Networks

Brian Madden identifies three key stocks poised for growth:

Telus (T TSX) stands out as Canada’s premier telecom, currently offering a substantial 7.4% yield, significantly above its 10-year average of 5.3%. Madden believes the dividend is not only secure but also positioned for accelerated growth, evidenced by recent cumulative increases. The telecom sector, in general, is expected to benefit from easier earnings comparisons due to lapping a year-old price war, alongside a shift in investor preference from low-yielding Guaranteed Investment Certificates to dividend-paying stocks. Telus is further advantaged by its diversified non-telecom businesses, strong financial standing, and operational focus, differentiating it from competitors absorbed in mergers. The company also possesses unpriced upside potential through plans to redevelop $3 billion in surplus urban real estate.

Nutrien (NTR TSX), the global leader in crop nutrients, offers integrated operations from potash and phosphate mining to nitrogen fertilizer production, coupled with a retail network of 2,000 outlets. Madden anticipates a bottoming in fertilizer pricing across key nutrients, supported by improving crop prices and the essential need for farmers to replenish soil nutrients depleted during recent periods of restrained application. While Nutrien shares have seen a 36% rebound from September lows, they remain 44% below their all-time peak. The stock trades at 1.2 times book value, aligning with its long-term average, and offers a 3.6% yield, consistent with the post-2018 merger average. Since its merger, Nutrien has increased its dividend by 36% and repurchased 23% of its shares.

Arista Networks (ANET NYSE) is a cloud networking specialist providing ethernet switching and routing solutions for data centers, campuses, and enterprises. Major cloud providers, including Meta, Oracle, Amazon, Alphabet, and Microsoft, are heavily investing in AI-compute capabilities, creating a significant demand for ethernet infrastructure. Arista is well-positioned to capitalize on this “AI arms race” with its deep ties to these high-spending clients. Although Arista trades at a premium valuation of 40 times expected earnings, Madden deems it warranted given the projected 17% compound annual earnings growth over the next three years, driven by strong secular tailwinds in AI and data center expansion. For example, Nvidia, a key supplier to AI data centers, recently reported a 42% year-over-year increase in revenue for its fiscal year 2024, underscoring the rapid growth in the sector.

Performance Review of Past Picks

Brian Madden also provided an update on previously recommended stocks:

• Cameco (CCO TSX): Showed a return of 64%.
• Roper Technologies (ROP NASD): Experienced a return of -2%.
• Canadian National Railway (CNR TSX): Saw a return of -20%.

The average total return for these past picks was 13%.