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THE JOHNSON, JOHNSTON AND MACRAE INVESTMENT GROUP

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The JJM Investment Group

June 08, 2021

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Dollar perfectly balanced with time

View From The Street: From “Fiction” To “Fundamentals” as the Recovery Takes Hold

Stocks that were propelled higher by rousing stories and huge growth expectations are now coming under pressure as investors place more emphasis on fundamentals.

 

2020 was marked by a small group of stocks leading equity markets higher. A common theme amongst this group was that they had compelling stories yet little fundamental support to justify where their share prices were trading. This sort of “low-quality” leadership off a market low, like we experienced back in March 2020, is typical. However, now that we are starting to see material evidence of corporate improvement – for example, global earnings per share (EPS) are expected to rise by more than 50% this year (Chart 3) – we are seeing a transition take hold (Chart 1).  The shares of companies that offer more visible and reliable earnings streams and trade at reasonable valuations, which we favour for the serious long-term investor, are being rewarded.  Historically, fairly valued high-quality companies tend to outperform expensive issues over the long term.  When we state expensive we are not implying low-quality. Many are in fact outstanding businesses that are growing rapidly.  However, the expectations baked into their valuations present a real risk to the downside because investors are vastly overpaying for what these stocks should realistically be worth (see our July 2020 blog where we speak to this: The S&P 500 and Cisco: A Historical Perspective).

 

Chart 1

Touching briefly on the economy and corporate earnings, GDP growth estimates continue to climb and are coming in at 6% and 4.4% for the world economy in 2021 and 2022, respectively. 2021 GDP growth, albeit off very low levels (negative, in fact), will register the largest annual increase in over 40 years (Chart 2).

 

Chart 2

Also, as mentioned above, Global EPS is expected to increase by more than 50% this year and the stage is set for earnings to expand at an above-average pace over the next few quarters, which should provide support for share prices that are trading at modest valuations (Chart 3).

 

Chart 3

 

 

 

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<p><span style="font-size:8.0pt"><span ms="" style="font-family:" trebuchet="">CIBC Private Wealth Management consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. &ldquo;CIBC Private Wealth Management&rdquo; is a registered trademark of CIBC, used under license. &ldquo;Wood Gundy&rdquo; is a registered trademark of CIBC World Markets Inc. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. &copy; CIBC World Markets Inc. 2021. Ryan Johnston is an Associate Investment Advisor working with Moe Johnson, Investment Advisor. Glen Johnson is an Associate Investment Advisor working with Moe Johnson, Investment Advisor. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.</span></span></p>
 

CIBC Private Wealth Management consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. “CIBC Private Wealth Management” is a registered trademark of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2021. Ryan Johnston is an Associate Investment Advisor working with Moe Johnson, Investment Advisor. Glen Johnson is an Associate Investment Advisor working with Moe Johnson, Investment Advisor. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

 
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CIBC Private Wealth” consists of services provided by CIBC and certain of its subsidiaries through CIBC Private Banking; CIBC Private Investment Counsel, a division of CIBC Asset Management Inc. (“CAM”); CIBC Trust Corporation; and CIBC Wood Gundy, a division of CIBC World Markets Inc. (“WMI”). CIBC Private Banking provides solutions from CIBC Investor Services Inc. (“ISI”), CAM and credit products. CIBC Private Wealth services are available to qualified individuals. Insurance services are only available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are only available through CIBC Wood Gundy Financial Services (Quebec) Inc.


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