The S&P 500 is not well positioned for the economic recovery and investors should look to Canadian stocks instead, BofA says

• The S&P 500 is expensive and investors looking to position for the recovery should look to Canada, BofA analysts wrote.
• Relative to the S&P 500, Canadian stocks enjoy greater exposure to commodities, boosted by oil and gold prices.
• But further hawkishness from the Fed could push up the dollar and hurt Canadian exporters.
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The S&P 500 is too richly valued to benefit much from the post-pandemic recovery and investors looking to ride the economic upcycle should add Canadian stocks, Bank of America strategists wrote in a note this week.

The S&P 500 is trading at a multiple of forward earnings not seen since the dot-com bubble, according to the BofA note. Meanwhile, Canada’s main equity benchmark, the TSX, trades at a steep discount to the S&P 500 – a historical leading indicator of Canadian overperformance.

Other factors bode well for the TSX, including a stronger Canadian dollar and a boom in commodities prices. Relative to the S&P 500, Canadian stocks enjoy greater exposure to commodities, and have gained from surging oil and gold prices.

Earlier this week, BofA analysts projected oil would break $100 per barrel by mid-2022.

But these positive portents could easily sour, the strategists warned. Further hawkishness from the Fed could push up the dollar and hurt Canadian exporters. And China’s bid to suppress commodity prices by unleashing its stockpiles onto the market could prove painful for Canada’s big materials and energy sectors.

Commodity-exposed sectors make up 26% of the TSX, versus 6% of the S&P 500.

The economies of Canada and the US have both begun to rebound from the pandemic, with annualized GDP growth for the first quarter coming in at 5.6% and 6.5%, respectively. However, Canada’s air travel and restaurant activity have remained sluggish, whereas the US is nearing pre-pandemic levels.