Market outlook: Third quarter 2024

17 July 2023 by National Bank Investments

Image of two hands holding a cell phone on a table and a glass of coffee.

U.S. stocks performed surprisingly well over the first five months of 2024 thanks to stronger-than-expected earnings reports and growing investor optimism that inflation may finally be starting to ease. Montrusco Bolton Investments inc., portfolio manager of the NBI U.S. Equity Private Portfolio provides an overview of the last quarter and shares what opportunities lie ahead.

Read the portfolio sub-advisor’s comments for this Fund included in certain NBI Portfolios profiles and NBI Private Wealth Management profiles.

The S&P500 Index rose 11.3% over the first five months of the year where in May alone, it rose almost 5%; its best showing since February. Semiconductor stocks such as Nvidia - whose chips are used to train artificial intelligence models such as ChatGPT – paced the advance, with electronic components makers and medical services shares also contributing to the gains.

After three months of stronger-than-expected price increases, U.S. inflation tailed off modestly in April, posting its lowest percentage advance since 2021. The number followed three months of stronger-than-expected inflation, suggesting that consumer prices and economic activity aren’t picking up steam.

Monetary policy remains a wild card. The Federal Reserve (Fed), which influences the actions of most of the world’s central banks, continues to push back hoped-for cuts to its key interest rate. Fed officials have said that a continued softening in data over the next few months would allow them to consider cutting borrowing costs at the end of 2024 or at the start of 2025.

Outlook and Challenges

Upcoming U.S. election candidate positioning could add to existing inflationary drivers such as aging demographics, a labor force reassessing its work/life balance, and regionalization trends. Consequently, we at Montrusco Bolton Investments Inc. (“we”) believe investors should focus on business models that have strong pricing power.

The uncertainty surrounding changes in supply chains, consumer behaviors, digitization, AI impacts and rising wages will have a lasting impact on business models.

Investment Opportunities

We continue to see relative valuation dislocations caused by rapidly shifting market narratives that are offering compelling opportunities to lock in profits and reinvest in misunderstood and therefore mispriced stocks.

One such opportunity is Rollins Inc., a U.S.-based pest-control company that operates in more than 70 countries worldwide with a highly recurring and recession-resilient business model. We believe that financial analysts underappreciate the margin expansion potential of the cost-control initiatives now being rolled out by the new management team after decades of operating under the founding family’s leadership. As a company with a history of acquisitions, Rollins can use further transactions to improve its scale - both in the U.S. and abroad - in what remains a very fragmented industry.

Future demand is expected to benefit from long-term trends such as global warming, which is driving an increase in pest numbers in regions that have traditionally been spared by the issue; an influx of new residents in the southern U.S. states, which have larger pest populations and therefore require more pest-control services; and growing customer focus on health and hygiene in a post-pandemic world.

Fund Strategy

The NBI U.S. Equity Private Portfolio, managed by Montrusco Bolton Investments Inc., is a Quality- Growth at a Reasonable Price (“GARP”) portfolio that focuses on a limited number of high-conviction large capitalization stocks. It is built from the bottom-up with mispriced assets that offer catalysts over our three-year forecasted horizon. ESG considerations permeate the process from the definition of the investible universe through screening, fundamental analysis, monitoring and sell decisions.

Fundamental, bottom-up research provides visibility into a stock’s return potential. It allows us to:

Understand how specific industry dynamics affect company operations.
Assess how the market perceives the company and what catalysts could offer rerating potential.
Conduct a multitude of valuation analyses to provide the clearest picture of a stock’s expected return profile.
Embed the downside valuation analysis.

By building a focused portfolio, we:

Minimize the dilution of total return from holding too many securities.
Avoid risks where we do not add value.
Respect our constant style biases.

Legal disclaimer

The information and the data supplied in the present document, including those supplied by third parties, are considered accurate at the time of their printing and were obtained from sources which we considered reliable. We reserve the right to modify them without advance notice. This information and data are supplied as informative content only. No representation or guarantee, explicit or implicit, is made as for the exactness, the quality and the complete character of this information and these data. The opinions expressed are not to be construed as solicitation or offer to buy or sell shares mentioned herein and should not be considered as recommendations.

The views expressed regarding a company, a security, an industry, a market sector in particular, future events (such as market and economic conditions), a company's or a security's performance, upcoming product offerings or other forecasts are solely those of Montrusco Bolton Investments Inc. and do not necessarily represent the views of National Bank of Canada and its subsidiaries (the “Bank”). These views are subject to change at any time based on market or other conditions and could cause actual results to differ materially from the ones anticipated by Montrusco Bolton Investments Inc. The Bank disclaims any responsibility to update such views. They do not constitute recommendations to buy or sell nor investment advice.

NBI Private Portfolios (the “Portfolios”) are managed by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada and are distributed by National Bank Financial, an indirect wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus of the Portfolios before investing. The Portfolios’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Portfolios are not guaranteed, their values change frequently and past performance may not be repeated. National Bank Financial is a member of the Canadian Investor Protection Fund.

The NBI Portfolios (the “Portfolios”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus of the Portfolios before investing. The Portfolios’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Portfolios are not guaranteed, their values change frequently and past performance may not be repeated.

NBI Private Wealth Management is offered by National Bank Investments Inc., a subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments and the use of an asset allocation service (such as NBI Private Wealth Management). Please read the prospectus of the NBI Funds and the Private Portfolios (the “Funds”) composing the NBI Private Wealth Management profiles before investing. The Funds are not guaranteed, their values change frequently and past performance may not be repeated. Investors must enter into an agreement with National Bank Investments Inc., which retains the services of National Bank Trust Inc. (for all activity in Quebec, Prince Edward Island, Saskatchewan and New-Brunswick) or Natcan Trust Company (for all activity in all other Canadian provinces and territories), subsidiaries of National Bank of Canada acting as portfolio managers, which gives them the authority to select, add or remove Funds composing the NBI Private Wealth Management profiles.

This index provider is included in this document: Standard & Poor’s (S&P/TSX, S&P 500 indices). This index provider is licensing its indices “as is”, makes no warranties regarding same, does not guarantee the suitability, quality, accuracy, timeliness and/or completeness of its indices or any data included in, related to or derived therefrom, assumes no liability in connection with its use and does not sponsor, endorse or recommend National Bank Investments Inc. or any of its products and services. The above index provider does not guarantee the accuracy of any index or blended benchmark model created by National Bank Investments Inc. using this index. No responsibility or liability shall attach to any member of the index provides or its respective directors, officers, employees, partners or licensors for any errors or losses arising from the use of this publication or any information or data contained herein. In no event shall the above index provider be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, legal or other expenses, or losses (including, without limitation, lost revenues or profits and opportunity costs) arising out of or in connection with the use of the content, even if advised of the possibility of such damages.

S&P Indices are trademarks of S&P Dow Jones Indices LLC, a division of S&P Global.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under licence by National Bank Investments Inc.

National Bank Investments is a signatory of the United Nations-supported Principles for Responsible Investment, a member of Canada’s Responsible Investment Association, and a founding participant in the Climate Engagement Canada initiative.