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Report prepared by:
Ryan Lewenza, CFA, CMT
North American Equity Strategist
2014 Year-End Forecast
Index EPS P/E Price
S&P 500 Index $115.50 17.0 1,960
S&P/TSX
Composite Index $875 16.7 14,650 ↑
Sector Recommendations
Sector U.S. Canada Preference
Financials Over Over U.S.
Consumer
Discretionary Under Market Canada
Industrials Over Over U.S.
Information
Technology Over Over U.S.
Energy Market Over ↑ Canada
Materials Under Under Canada
Health Care Over Under ↓ U.S.
Consumer
Staples Market Market Canada
Utilities Under Under Canada
Telecom
Services Under Under Canada
Source: Portfolio Advice & Investment Research
Over=Overweight
Under=Underweight
Market=Marketweight
↑ = Upgrade
↓ = Downgrade
This Document is for distribution to Canadian
clients only.
Please refer to Appendix A of this report for important
disclosure information.
Q2/14 Equity Market Update
Highlights
North American equities were up in Q1/14, led by the Canadian
market. The S&P/TSX Composite Index (S&P/TSX) posted a gain
of 5.2%, while the S&P 500 Index (S&P 500) advanced a more
modest 1.3%. From a style perspective, small caps
underperformed in the U.S. (outperformed in Canada), while
value trumped growth.
We are upgrading the Canadian energy sector to overweight. Our
constructive outlook for the energy sector has led to an increase
in our year-end price target for the S&P/TSX to 14,650, from
14,250. Our S&P 500 price target remains unchanged at 1,960.
Most leading economic indicators we track are pointing to a
recovery in economic momentum and growth in the coming
quarters. Key areas of the U.S. economy continue to improve,
supporting TD Economics’ forecast for GDP growth of 2.7% in
2014, up from 1.9% in 2013. Canada’s economy should benefit
from the improving U.S. economy, but the slowdown in China is
likely to weigh on our heavy resource-based economy.
Valuations for the North American equity markets have expanded
markedly since the 2009 market lows, and are now at premiums
to their long-term averages. Despite this, we continue to forecast
additional gains for 2014, driven by improving corporate earnings.
The technical outlook for the North American equity markets
remains positive. The S&P 500 is in a long-term uptrend and
above its rising 50-week moving average (MA). The S&P/TSX
broke above an importance resistance level of 12,900 in Q4/13,
and is above key MAs. However, it is now trading at stiff
resistance at 14,300, and we believe commodity prices will need
to trend higher for the S&P/TSX to break above this level.
We maintain a cyclical bias, preferring the industrials, financials
and information technology sectors. These sectors stand to
benefit from an improving global economy, rising interest rates,
and our expectations for a ramp up in corporate spending in the
coming quarters. We are increasing our cyclical stance in Canada
by upgrading the energy sector to overweight, and downgrading
the health care sector to underweight.
April 14, 2014
North American Equity Strategy April 14 , 2014
Page 2
Indices Q1 Return 2013 Return
S&P 500 1.3% 29.6%
Dow Jones Industrials -0.7% 26.5%
Small Cap (Russell 2000) 0.8% 37.0%
Growth (Russell 1000) 0.7% 31.2%
Value (Russell 1000) 2.4% 29.4%
S&P/TSX Composite 5.2% 9.6%
S&P/TSX Small Cap 7.1% 4.4%
Q1 Sector Performance U.S. (S&P 500) Canada (S&P/TSX)
Financials 2.2% 1.9%
Consumer Discretionary -3.2% 3.7%
Industrials -0.4% 1.8%
Information Technology 1.9% 5.6%
Energy 0.2% 8.7%
Materials 2.3% 9.2%
Health Care 5.4% 12.6%
Consumer Staples -0.2% 6.9%
Utilities 9.0% 7.5%
Telecom Services -0.7% 3.0%
Q2/14 Equity Market Update
North American equities were up in the first quarter, led by the
Canadian market. The S&P/TSX posted an impressive gain of
5.2%, while the S&P 500 advanced a more modest 1.3% (Exhibit
1). From a style perspective, small caps underperformed in the
U.S. (outperformed in Canada), while value trumped growth in
the quarter. In recent weeks, there has been a notable rotation
from high growth momentum stocks into value stocks such as
U.S. large-cap technology and Canadian energy shares. Given
our expectations for improving economic growth, and interest
rates to slowly move higher in the coming months, we believe
value could continue to outperform growth. This is one factor in
our decision to upgrade the Canadian energy sector to
overweight. Our more constructive outlook for the energy sector
(26% weight in the S&PT/TSX) has led to an increase in our year-
end price target for the S&P/TSX to 14,650, from 14,250. Our
S&P 500 price target remains unchanged at 1,960.
On a sector basis, defensive sectors generally outperformed the cyclical sectors in Q1/14, with utilities, up 9% in the U.S.
and 7.5% in Canada, followed by strong performance in the health care sector, up 5.4% in the U.S. and 12.6% in Canada.
The U.S. consumer discretionary sector underperformed the most this past quarter, down 3.2%, while the industrials were
the weakest in Canada advancing 1.8%. The telecommunications services and financials sectors also underperformed in
the quarter.
Remaining bullish but see potential weakness in the summer/fall period
We believe the North American equity markets will be higher by year-end, and continue to forecast high single-digit total
returns for 2014. This view is predicated on our expectations for: 1) economic growth to improve following a weather-
induced slowdown; 2) improved corporate earnings growth, following an anticipated challenging Q1/14 earnings season;
3) the Federal Reserve (Fed) to leave the federal funds rate unchanged until the spring/summer of 2015. Additionally,
equity valuations, while above their long-term averages, are not at levels typically associated with major market tops. That
said, the North American equity markets could encounter some headwinds in the second or third quarter of 2014, which
we would view as a buying opportunity. First, the weak seasonal period of May to September is quickly approaching
(Exhibit 2). Since 1990, the May through September period has returned on average -0.17%, versus 8.20% for the
October to April period. Moreover, in years with a U.S. mid-term election, the summer has historically been even weaker,
declining 2.5% on average in Q2, mainly driven by poor performance in June. Finally, while we expect the Fed to keep
interest rates unchanged until next year, equity markets will likely begin to price in a 2015 rate increase sometime in
H2/14. Historically, the S&P 500 has typically pulled back an average of 6.5% in the six-months preceding the first federal
funds rate hike. Therefore, with weak seasonality approaching, and the equity markets likely to price in a federal funds
rate hike in H2/14, we expect increased volatility over the next quarter or two. However, this is likely to provide another
buying opportunity, within the context of the cyclical bull market.
Exhibit 2: S&P 500 is approaching weak seasonal period; S&P 500 typically declines 6.5% before first Fed hike
0.28%
-0.08%
1.44%
1.72%
0.98%
-0.56%
0.77%
-1.01%
-0.34%
1.48% 1.43%
1.93%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
S&P 500 Monthly Price Return
Exhibit 1: Q1/14 Price Returns
Source: Bloomberg Finance L.P. As of April 1, 2014 Source: Bloomberg Finance L.P. As of April 1, 2014
Period is 1990 to current based on monthly return data
Source: Bloomberg Finance L.P. As of April 1, 2014
Date of First
Fed Hike 6 Months Before 6 Months After
2-May-83 -7.5% -6.9%
16-Dec-86 -9.5% -9.3%
4-Feb-94 -2.7% -6.8%
30-Jun-99 -7.1% -9.9%
30-Jun-04 -5.6% -6.5%
Average -6.5% -7.9%
Max correction
North American Equity Strategy April 14 , 2014
Page 3
Economic Update
As North America emerges from the deep freeze experienced over the winter, we expect economic momentum to improve
following the weather-induced Q1/14 slowdown. According to the U.S. National Weather Service, the December to
February period was the coldest in 20 years. From record high flight cancelations to the Fed’s Beige Book update, which
mentioned weather 119 times, the severe winter weather impacted consumer spending and economic activity in recent
months. Coincident with rising temperatures, we believe more recent economic releases are beginning to capture the
improving economic momentum. U.S. light vehicle sales rebounded sharply in March, following a marked slowdown in the
December to February period. In March, vehicle sales rose to 16.3 million units annualized, up from February’s
disappointing 15.3 million units, and the highest level since February 2007 (Exhibit 3). Recent manufacturing data has
also shown improved strength, with the Philadelphia Federal Manufacturing Index (Philly Fed) bouncing back to 9 in
March, from -6.3 in February and the national ISM Manufacturing Index (ISM) rising 0.5 to 53.7 in March. Given the Philly
Fed Index typically troughs before other regional manufacturing indices, and the ISM manufacturing new orders sub-index
remains strong, we believe the U.S. manufacturing sector is approaching an inflection point, and should improve in the
coming months. Finally, on the employment front, initial jobless claims recently declined to new cycle lows of 317,000 (4-
week MA), while nonfarm payrolls rebounded to 192,000 in March, nudging the 12-month average up to a respectable
187,000.
Exhibit 3: U.S. vehicle sales rebound in March; U.S. jobless claims decline to lowest level in years
13.0
13.5
14.0
14.5
15.0
15.5
16.0
16.5
Feb-12 Aug-12 Feb-13 Aug-13 Feb-14
U.S. Total Light Vehicle Sales (SAAR) (in millions)
Other economic indicators we track are pointing to a potential improvement in economic data in the coming months. The
U.S. Citigroup Surprise Index, which tracks economic releases relative to expectations, has bottomed in the
spring/summer in each of the last four years (Exhibit 4). We believe this could play out again this year. Many of the major
economies we track are accelerating, with Purchasing Managers Index (PMI) readings well above the 50 boom/bust level,
and up from weaker readings six months ago. China is the exception, with the region clearly decelerating. From our
perspective, both U.S. and global economic data are pointing to an improvement in the coming months.
Exhibit 4: U.S. economic momentum set to improve; Global PMI heat map points to economic acceleration
-150
-100
-50
0
50
100
150
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14
Citigroup U.S. Economic Surprise Index
Source: Bloomberg Finance L.P. As of April 1, 2014
Source: Bloomberg Finance L.P. As of April 1, 2014 Source: Bloomberg Finance L.P. As of April 1, 2014
Global PMIs 1 Month 3 Months 6 Months
Current Ago Ago Ago
Global 53.3 53.0 53.1 51.6
U.S. 53.7 53.2 56.5 56
Canada 57.2 56.8 53.7 51
Japan 53.9 55.5 55.2 52.5
U.K. 55.3 56.2 56.9 56.4
Euro zone 53.0 53.2 52.7 51.1
Germany 53.7 54.8 54.3 51.1
France 52.1 49.7 47.0 49.8
Italy 52.4 52.3 53.3 50.8
China 50.3 50.2 51.0 51.1
>= 52 52 to 50 <= 50
Source: Bloomberg Finance L.P. As of April 1, 2014
200
300
400
500
600
700600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
S&P 500 & U.S. Initial Jobless Claims
S&P 500 (LHS)
U.S. Initial Jobless Claims 4-Week MA (RHS)
(inverted)
North American Equity Strategy April 14 , 2014
Page 4
We expect Canadian economic activity to pick up in the coming quarters. The weak Canadian dollar and expected
improvements in the U.S. economy could bode well for the Canadian manufacturing sector and exports. However, this
could be tempered by a continued slowdown in China, which would lessen incremental demand for commodities — a
headwind for a resource-based economy. Looking at recent economic releases, the Canadian economy added a robust
43,000 jobs in March, following a recent string of poor reports. The 3-month MA (used to smooth the volatile monthly
results) has turned up and could be signaling more robust employment gains in the coming months. Recent
manufacturing data (Ivey and RBC/Markit) have also improved, with both indicators comfortably above the 50 boom/bust
level. Finally, the OECD Leading Indicator Y/Y continues to trend higher, pointing to Canadian GDP growth of 2% or
higher.
Exhibit 5: Canadian economy created 43,000 jobs in March; OECD Canada CLI index is improving
-40
-30
-20
-10
0
10
20
30
40
50
60
-60
-40
-20
0
20
40
60
80
100
120
Mar-09 Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13
Canadian Labour Force Net Change
Monthly Change
3-Month MA
(in thousands)
Key Point: Most leading economic indicators we track are pointing to a recovery in economic momentum and growth in
the coming quarters. Key areas of the U.S. economy continue to improve, supporting TD Economics’ forecast for GDP
growth of 2.7% in 2014, up from 1.9% in 2013. Canada’s economy should benefit from a strengthening U.S. economy, but
the slowdown in China is likely to continue to weigh on Canada’s heavy resource-based economy.
Source: Bloomberg Finance L.P. As of April 1, 2014
Trend Restored
-4
-2
0
2
4
6
8
10
12
'80 '84 '88 '92 '96 '00 '04 '08 '12
OECD Canada Leading Indicator Y/Y
Source: Bloomberg Finance L.P. As of April 1, 2014
North American Equity Strategy April 14 , 2014
Page 5
Fundamental Update
With the S&P 500 up 170% since the March 2009 lows and 30% in 2013, equity valuations have expanded markedly, with
some analysts pointing to limited upside in equities as a result. While we believe equity returns are likely to be more
modest, we do not believe the elevated valuations are pointing to an imminent market top. We continue to forecast high
single-digit total returns for the North American equity markets in 2014, driven by earnings growth rather than an
expansion in valuations. Given the growing discussion about valuations becoming stretched we examined their current
state and conclude that the U.S. stock market is moderately overvalued.
The most common and traditional valuation metric is the trailing or forward price-to-earnings (P/E) ratio. Currently, the
S&P 500 is trading at 17.3x trailing earnings, which is 5.4% above its long-term average (Exhibit 6). On a forward basis,
the S&P 500 is trading at 16.0x, which is a 3.5% discount to its average. The S&P 500 is trading at 2.6x price-to-book
(P/B), which is an 8.6% discount to its long-term average. Two long-term valuation metrics that are particularly extended
include the Cyclically Adjusted P/E ratio (CAPE) and the total U.S. equity market capitalization to U.S. GDP ratio. The
CAPE compares stock prices to their 10-year average earnings, and is indicating the stock market is expensive at 25.4x,
a 54% premium to its long-term average. This metric is often cited by the equity bears as a sign of a frothy market that is
destined for a steep decline. We ascribe less weight to this measure because it has proven to be a poor timing model and
its reliability is questionable. Since 1990 the CAPE has been below the long-term average just 5% of the time (i.e.
“overvalued” 95% of the time), while the S&P 500 has delivered a total return of 785% (9.4% annually). Finally, the total
U.S. market capitalization to U.S. GDP ratio is also elevated at 1.15x, which is 62% above its long-term average.
However, similar to the CAPE, this metric has generally been above its long-term average since the 1990s. Although
valuations have expanded, with most measures now above their long-term averages, it does not necessarily imply an
imminent top or a looming material market decline, in our view.
Exhibit 6: S&P 500 valuations are moderately overvalued and the total U.S. market cap to GDP ratio is elevated
S&P 500 Index Long-term % Above
Valuation Metric Current Average /Below Average
Trailing P/E 17.3 16.4 5.4%
Forward P/E 16.0 16.5 -3.5%
EV/EBITDA 10.6 10.3 3.1%
P/Sales 1.7 0.9 86.4%
P/Cash Flow 9.2 7.1 29.7%
P/Book Value 2.6 2.9 -8.6%
U.S. Market Cap to GDP 1.2 0.7 61.8%
CAPE 10-Year P/E 25.4 16.5 54.2%
Corporate profits, which are also a key driver of equity returns, have been overshadowed by the expansion in valuations.
Total U.S. corporate profits increased 8% Y/Y in Q4/13 to a new record high US$1.74 trillion (Exhibit 7). This broad
measure of U.S. corporate profits includes all U.S. companies, capturing the undeniable strength of Corporate America.
Alternatively, looking at a more narrow measure, S&P 500 earnings are up 86% since the 2008 low, and are projected to
rise 8% Y/Y to US$117.50 in 2014. Although our forecast for S&P 500 2014 earnings is slightly lower at US$115.50 (7%
Y/Y), we believe corporate profits will remain robust and support equities going forward. Crucially, the rally in the S&P 500
has largely kept pace with growth in corporate profits, as seen by the tight fit between the S&P 500 and its earnings
stream (Exhibit 7). This is an important piece of the puzzle that is often overshadowed by concerns about valuations.
Exhibit 7: U.S. corporate profits are hitting new highs; S&P 500 rally has tracked the rise in earnings
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
'71 '76 '81 '86 '91 '96 '01 '06 '11
U.S. Total Market Cap Relative to U.S. GDP
Jun 07 1.05x
Mar 001.42x
Current 1.15x
(in billions)
Source: Bloomberg Finance L.P. As of April 1, 2014 Source: Bloomberg Finance L.P. As of April 1, 2014
Source: Datastream. As of April 1, 2014
Includes IVA and CCA adjustment Source: Bloomberg Finance L.P. As of April 1, 2014
Long-term Average
$0
$20
$40
$60
$80
$100
$120
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
'00 '02 '04 '06 '08 '10 '12 '14
S&P 500 Index and Earnings
S&P 500
S&P 500 Trailing 12-Month Earnings
North American Equity Strategy April 14 , 2014
Page 6
Similar to the U.S., Canadian equity valuations are moderately overvalued relative to historic levels. However, the outlook
for S&P/TSX earnings appears challenged, driven in part by negative earnings revisions in the volatile materials sector.
Currently, the S&P/TSX is trading at 19.4x trailing earnings, which is 2.5% above its long-term average of 18.9x (Exhibit
8). On a forward basis, the S&P/TSX appears more attractive trading at 15.8x, a modest premium to its average of 15.5x.
However, this is based on the consensus estimate of roughly $900, which we believe is too high. On our 2014 earnings
forecast of $875, the S&P/TSX trades at 16.3x. On a price to cash flow basis, the S&P/TSX trades at 8.2x, a 19%
discount to its long-term average. This is arguably a better metric for the S&P/TSX, given its volatile earnings stream. On
a P/B basis, the S&P/TSX trades at 2x, which is in-line with its long-term average. Overall, we believe the S&P/TSX is
overvalued, but less so when compared to the S&P 500. For the S&P/TSX to maintain its strong price trajectory, we
believe earnings will need to improve and with forward earnings estimates continuing to decline this may prove to be a
challenge.
Exhibit 8: S&P/TSX is moderately overvalued; S&P/TSX earnings estimates continue to trend lower
S&P/TSX Index Long-term % Above
Valuation Metric Current Average /Below Average
Trailing P/E 19.4 18.9 2.5%
Forward P/E 15.8 15.5 1.8%
EV/EBITDA 11.3 8.5 33.5%
P/Sales 1.8 1.3 35.8%
P/Cash Flow 8.2 10.2 -19.1%
P/Book Value 2.0 2.0 0.6%
Key Point: Valuations for the North American equity markets have expanded markedly since the 2009 market lows, and
are now at premiums to their long-term averages. Despite this, we continue to forecast additional gains for 2014, driven by
improving corporate earnings.
Source: Bloomberg Finance L.P. As of April 1, 2014 Source: Bloomberg Finance L.P. As of April 1, 2014
$800
$850
$900
$950
$1,000
$1,050
$1,100
$1,150
$1,200
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14
S&P/TSX Composite Annual EPS Estimates
2014E = $901.26
2013 = $842.50
2015E = $1,015.96
North American Equity Strategy April 14 , 2014
Page 7
Technical Considerations
The U.S. equity markets have pulled back from their recent highs, with the Nasdaq Composite (Nasdaq) bearing the brunt
of the weakness. The Nasdaq is off 6% from its highs, and more importantly, has broken below its year-and-a-half uptrend
(Exhibit 9). Currently trading around the 4,100 level, the Nasdaq needs to hold its 200-day moving average (MA) at 3,925,
otherwise, a break below its MA could be a warning sign of a potentially larger correction. The S&P 500 remains in a very
bullish uptrend, and above key MAs. We believe there is an ongoing rotation within the stock market from high growth
momentum stocks to more defensive laggards. This could explain why the S&P 500 has held up much better than the
Nasdaq or the small-cap Russell 2000 Index. While we see the potential for some weakness in the summer months, we
maintain our bullish stance on U.S. equities, with the S&P 500 in a long-term uptrend, and above its rising 50-week MA,
currently at 1,742. To become more cautious on the U.S. equity markets, we need to see the S&P 500 break below its 50-
week MA, the cyclical sectors, notably financials break down, and the NYSE Advance/Decline line head lower. Until these
conditions are met, we will maintain our bullish long-term technical outlook for the U.S. equity market.
Exhibit 9: Nasdaq composite broke below its uptrend; S&P 500 remains in an uptrend and above its 50-week MA
2,700
2,900
3,100
3,300
3,500
3,700
3,900
4,100
4,300
4,500
Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14
Nasdaq Composite
Nasdaq Comp
50-day MA
200-day MA
The technical profile for the S&P/TSX has improved since it broke above key technical resistance of 12,900 in Q4/13. The
S&P/TSX is trading above its rising 200-day MA, with key sectors, such as financials and energy leading the Canadian
market. However, the S&P/TSX is now trading at an important resistance level of roughly 14,300, which dates back to the
2011 and 2007 highs. Given its technical importance, the S&P/TSX could oscillate around this level for some time.
The CRB Commodity Index recently broke above its three-year downtrend, which is bullish; however, the industrial
commodities, such as copper and steel remain weak. For the S&P/TSX to break decisively above 14,300, we believe
commodity prices, particularly the industrial commodities, will have to move higher. Should this occur, we would likely
revisit our forecast for the S&P 500 to outperform the S&P/TSX this year.
Exhibit 10: S&P/TSX is trading at stiff resistance; Commodities breakout, but industrial commodities remain weak
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
S&P/TSX Composite Index
S&P/TSX
200-day MA
Resistance
Key Point: The technical outlook for North American equity markets remains positive. The S&P 500 is in a long-term
uptrend and above its rising 50-week MA. The S&P/TSX is trading at resistance and we believe commodity prices will
need to trend higher for the S&P/TSX to break above this important 14,300 level.
Source: Bloomberg Finance L.P. As of April 1, 2014 Source: Bloomberg Finance L.P. As of April 1, 2014
Source: Bloomberg Finance L.P. As of April 1, 2014 Source: Bloomberg Finance L.P. As of April 1, 2014
250
270
290
310
330
350
370
390
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14
CRB Commodity Index
CRB Index
200-day MA
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13
S&P 500 Index
S&P 500
50-week MA
North American Equity Strategy April 14 , 2014
Page 8
Sector Positioning
We are making two changes to our Canadian sector recommendations: upgrading the energy sector to overweight and
downgrading health care to underweight. The upgrade in the energy sector to overweight is based on: 1) narrowing crude
differentials between the Western Canadian Select benchmark and the West Texas Intermediate (WTI) oil benchmark; 2)
an improving earnings outlook; and 3) the sector’s improving technical profile following a break above its long-term
relative downtrend. The downgrade of the heath care sector to underweight is due to: 1) lofty 2014 earnings expectations;
2) valuation concerns with the sector trading at a 21.4x trailing earnings multiple and 5.1x P/B ratio (180% to five-year
average); and 3) the sector’s weakening technical profile.
We are not any making changes to our U.S. sector recommendations. Exhibit 11 outlines our specific sector
recommendations for the Canadian and U.S. equity markets.
Exhibit 11: U.S. and Canadian sector recommendations
Stance Rationale Stance Rationale
Financials Overweight
• Stronger labour and housing markets should support loan
growth
• Preference is for U.S. financials given more attractive
valuations and frothy Canadian housing market
Overweight
• Economic conditions should support steady EPS and
dividend growth
• Attractively valued on P/E basis (12.7x FP/E) but fairly
valued on P/B (1.8x)
Consumer
Discretionary Underweight
• High earnings expectations for 2014
• Sector is expensive at 18.3x FP/E
• Technical profile is weakening
Marketweight
• Attractively valued at 15.3x FP/E and strong technical
trends
• Our preference is for Canadian discretionary given more
attractive valuations
Industrials Overweight
• Play on improving global growth and Capex spending
• Strong technical trends
• Preference is for U.S. industrials given higher U.S. GDP
growth expectations and cheaper valuations
Overweight• Play on improving global growth
• Strong technical trends
Information
TechnologyOverweight
• Attractive valuations at 14.5x FP/E
• Strong balance sheets and cash flow
• Preference is for U.S. technology given greater breadth
Overweight• Sector could benefit from companies putting their cash
hoard to work
• Improving technical trends
Energy Marketweight
• Earnings are under pressure and sector is facing negative
revision trends
• This is offset by reasonable valuations (13.7x FP/E) and
strong cash flows
Overweight
(↑ from
marketweight)
• Strong earnings outlook and positive earnings revisions
• Improving technical profile with the sector breaking above
its long-term relative downtrend
Materials Underweight• Weak earnings and lofty 2014 earnings estimates
• Weak relative technical trendsUnderweight
• Weak commodity prices to provide headwinds to earnings
outlook
• Weak relative technical trends
• Preference is for Canadian materials
Health Care Overweight
• Positive long-term trends with aging population
• Preference is for U.S. health care given greater breadth
and higher percentage spent on health care costs as
percentage of GDP
Underweight
(↓ from
marketweight)
• Deteriorating technical profile
• High earnings expectations for 2014
• Valuations are at high-end on P/E and P/B basis
Consumer Staples Marketweight• Sector is fairly valued at 18x FP/E
• Weak technical trends on the back of slowly rising interest
rates
Marketweight
• Solid technicals for the sector given new price highs and
strong relative strength
• We prefer Canadian staples sector to U.S. given better
technicals and more attractive valuations
Utilities Underweight• Premium valuation with low earnings growth
• Negatively correlated with interest rates. Should
underperform if rates move higher
Underweight
• Premium valuation with low earnings growth
• Negatively correlated with interest rates. Should
underperform if rates move higher
• Prefer Canadian utilities
Telecom Services Underweight
• The sector trades at a high 2.5x P/B and unjustified P/E
premium to the market
• Weak technical trends on the back of slowly rising interest
rates
Underweight• Weak relative technical trends
• Trading at a P/E and P/B premium to long-term averages
SectorU.S. (S&P 500) Canada (S&P/TSX Composite)
Key Point: We maintain a cyclical bias, preferring the industrials, financials and information technology sectors. These
sectors stand to benefit from an improving global economy, rising interest rates, and our expectations for ramp up in
corporate spending in the coming quarters. We are increasing our cyclical stance in Canada by upgrading the energy
sector to overweight, and downgrading the health care sector to underweight.
Source: Portfolio Advice & Investment Research. As of April 1, 2014
North American Equity Strategy April 14 , 2014
Page 9
Conclusion
Overall, we see the North American economy improving in the coming quarters, which should support stronger earnings
growth and further equity gains by year-end. The technical outlook remains constructive and supports our fundamental
conclusions. We are approaching the weak seasonal summer period, which could lead to higher volatility, and some
short-term market weakness. However, we would look at weakness over the spring/summer months as an opportunity to
increase equity exposure, as we believe equities can continue to grind higher on stronger earnings growth.
North American Equity Strategy April 14 , 2014
Page 10
Appendix A – Important Disclosures
General Research Disclosure
The statements and statistics contained herein are based on material believed to be reliable, but are not guaranteed to be accurate or
complete. This report is for informational purposes only and is not an offer or solicitation with respect to the purchase or sale of any
investment fund, security or other product. Particular investment, trading, or tax strategies should be evaluated relative to each
individual’s objectives. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance.
This document does not provide individual financial, legal, investment or tax advice. Please consult your own legal, investment and tax
advisor. All opinions and other information in this document are subject to change without notice. The Toronto-Dominion Bank and its
affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered.
TD Waterhouse Canada Inc. and/or its affiliated persons or companies may hold a position in the securities mentioned, including
options, futures and other derivative instruments thereon, and may, as principal or agent, buy or sell such securities. Affiliated persons
or companies may also make a market in and participate in an underwriting of such securities.
Technical Research Disclosure
The opinions expressed herein reflect a technical perspective and may differ from fundamental research on these issuers. Fundamental
research can be obtained through your TD Wealth advisor or on the Markets and Research site within WebBroker.
The technical research opinions contained in this report are based on historical technical data and expectations of the most likely
direction of a market or security. No guarantee of that outcome is ever implied.
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TD Waterhouse Canada Inc. makes its research products available in electronic format. These research products are posted to our
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Analyst Certification
The Portfolio Advice and Investment Research analyst(s) responsible for this report hereby certify that (i) the recommendations and
technical opinions expressed in the research report accurately reflect the personal views of the analyst(s) about any and all of the
securities or issuers discussed herein, and (ii) no part of the research analyst’s compensation was, is, or will be, directly or indirectly,
related to the provision of specific recommendations or views expressed by the research analyst in the research report.
Conflicts of Interest
The Portfolio Advice & Investment Research analyst(s) responsible for this report may own securities of the issuer(s) discussed in this
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Corporate Disclosure
TD Wealth represents the products and services offered by TD Waterhouse Canada Inc. (Member – Canadian Investor Protection
Fund), TD Waterhouse Private Investment Counsel Inc., TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and
TD Wealth Private Trust (offered by The Canada Trust Company).
The Portfolio Advice and Investment Research team is part of TD Waterhouse Canada Inc., a subsidiary of The Toronto-Dominion
Bank.
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