Equities climb despite rising macro risks

Equity markets continue to climb on robust earnings and investor optimism, despite macro risks, says Craig Jerusalim, senior portfolio manager and head of global GARP at CIBC Global Asset Management.  

In a May 4 interview, Jerusalim said this quarter’s earnings results have been nothing short of extraordinary, with Canadian companies delivering 12% sales and 20% earnings growth, driven by strong performance in materials and commodities.

“Investors have become adept at buying the dip,” he said, “and the prevailing emotion is not fear of loss, but fear of missing out.”

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Global Asset Management.

But Jerusalim cautioned that an ongoing rally depends on consumer strength. Wells Fargo, he said, found that while consumers are spending more on gas, they need to adjust spending in other categories, which could take months.

Sustained market momentum also depends on geopolitical stability, including a resolution in the Middle East. “The longer the Strait of Hormuz remains closed to commerce and oil flow, the more relentless the pressure on energy prices, consumer sentiment and global growth will become,” he said.

The effects are already showing, Jerusalim added, with airlines cancelling flights, and hotels and restaurants losing bookings, which threatens broader economic activity and growth.

A new dynamic to the global energy landscape is the UAE’s decision to exit OPEC. “If OPEC’s cohesion begins to fracture, or if Saudi Arabia, the cartel’s de facto leader, moves to discipline dissenters through a supply response, the result could be a structurally lower long-term oil price environment.”

Canadian producers like Suncor, Cenovus, Canadian Natural Resources and Whitecap are “well positioned to weather any commodity backdrop,” he said. These producers’ low costs, geography and supportive policy create a competitive edge.

One more recent development is U.S. Section 232 tariff changes on steel and aluminum, which adds uncertainty for Canadian manufacturers, weakens export advantages and complicates USMCA negotiations, Jerusalim said.

M&A update

He pointed out that several notable deals have made headlines for TSX-listed companies, including GFL Environmental’s acquisition of Secure Waste. But despite being a growth-enhancing transaction, he said the deal initially drew a weak reaction.

“The dominant narrative that Secure would meaningfully amplify GFL’s oil sensitivity and volatility overlooks the critical evolution in Secure’s business. In recent years, the company has deliberately shifted away from historically volatile exposure to drilling and completion activity,” he said.

Further, Jerusalim said Canadian oil sands production is a long-term strategic asset. GFL reinforced its outlook with a strong beat-and-raise quarter and 7% pricing power.

Another major deal was Shell’s $22-billion acquisition of Arc Resources. It signals renewed foreign confidence in Canadian energy and boosts the likelihood of approval for Shell’s Phase 2 LNG project, he said.

Meanwhile, G Mining made a $3-billion bid for G2 Goldfields in Guyana. And Agnico Eagle announced a triple-deal to consolidate a world-class gold mining hub in Finland.

“Meaningful synergies arise from combining adjacent operations, and the ability to drive greater throughput through shared infrastructure transforms these from mere growth acquisitions into genuine value-creating events,” Jerusalim said.

He said investors should continue to watch geopolitical developments and Canadian earnings reports to determine whether equities can continue to rally.

This article is part of the Advisor To Go program, sponsored by CIBC Global Asset Management. The article was written without input from the sponsor.