This bull market has legs, Paradigm Capital says

The fourth quarter rally that saw the S&P 500 end 2023 up a whopping 24 per cent has some feeling the market may be a little toppy.

But Paradigm Capital analyst Aazan Habib says that while 2024 may start a little shaky this bull is strong and will end the year displaying that strength.

In a research up to clients January 3 entitled “Q1/24 Outlook: Equity Bull Market Continues as Breadth Broadens; Looking for Stronger H2” Habib shared his thoughts.

“North American equities remain in a primary bull market that looks poised to continue as we head into a US presidential election year, which tends to have a positive bias (although with returns skewed toward the back half of the year),” he said. “The major US large-cap equity benchmarks are attempting to break out through their 2021 highs while small-cap benchmarks are starting to break out of 2-year ranges. In Canada, monthly momentum indicators are getting closer to triggering long-term bullish signals for the TSX Composite, TSX Small Cap Index and TSX Venture. Breadth indicators continue to show broadening participation globally while implied correlation between index constituents is declining, making for a healthy stock picking environment.”

The analyst said don’t be dismayed by a first quarter that may show signs of softness.

“Q1 seasonality tends to be softer in an election year but our backtests of recent breadth/momentum signals suggest strong odds of higher stock prices over the next year. The Q4/23 rally has left markets in in an overbought state heading into the year, which will likely result in some base building/corrective action before the next leg higher,” he wrote. “Asset allocation trends continue to favour equities over fixed income while deteriorating momentum in interest rates supports the case for valuation expansion. Bullish trend signals for equity benchmarks relative to short-duration Treasuries could be a catalyst for rotation out of money market funds and back into equities.”

Habib shared his estimates for the indices.

“We are targeting upside potential toward the 5200-5400 range on the S&P 500 over the next year (+11–15%) compared to consensus at 4841,” he said. “For the TSX Composite, we see potential toward the 26,000 zone on a breakout through 22,000 (consensus is at 23,335), although we have lower confidence in the Canadian market than the US due to weaker momentum signals. Canadian small/microcaps appear to have made a major cycle low in Q4/23 and look poised for a recovery, although we need the TSX Small Cap Index to recapture 750 and the Venture to recapture 600 to confirm this view.”