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In 2024, North American stock indices delivered impressive double-digit returns. Despite these gains, TD Asset Management's Chief Investment Officer David Sykes believes that the region's markets still hold significant potential. In a recent interview with the Globe and Mail, Sykes discussed his outlook on equity and fixed income markets, identified key risks, and provided insights into achieving superior investment results. He emphasized the importance of focusing on long-term strategies rather than short-term predictions, highlighting the variability in market returns over time.

Potential for Continued Growth in North American Markets

Sykes outlined the favorable conditions supporting further growth in North American equities. He noted that earnings remain robust, inflation appears to have peaked, and the overall economic environment is stable. The Canadian market, trading at about 16 times forward earnings with a dividend yield near 3%, presents attractive characteristics. Additionally, financial institutions are optimistic about reduced loan losses, while energy companies benefit from deleveraging and strong cash flow generation. These factors contribute to a positive outlook for Canada in 2025.

Expanding on this, Sykes explained that while multiple expansion may not be substantial, solid earnings growth—around 10%—is anticipated. The Canadian market's valuation and dividend yield make it appealing. Furthermore, the financial sector is expected to thrive due to improved loan loss scenarios and increased capital market activity. Energy firms are also poised for success following their efforts to reduce debt and enhance profitability. Overall, these elements create a compelling case for optimism regarding Canadian equities in the coming year.

Opportunities and Risks Across Sectors and Markets

The U.S. market, particularly the technology sector, stands out as a key driver of potential higher returns. Earnings growth expectations in the United States are around 15%, driven by strong performance from leading tech companies. However, Sykes cautioned that risks exist if earnings do not meet projections. Another significant risk lies in interest rates, which have risen significantly over the past few months. If yields continue to climb beyond certain thresholds, it could challenge the current asset allocation favoring stocks over bonds.

Sykes elaborated on sector-specific opportunities and challenges. Financials and industrials in the U.S. appear promising, especially with deregulation and anticipated M&A activity. Conversely, sectors like consumer staples face pressures from changing consumer habits and competition. In Canada, financials, energy, and telecommunications show promise, while heavy competition in telecom and slower immigration impact volume and pricing growth. Quantum computing, while innovative, remains too early for direct investment but offers indirect benefits through enhanced operational efficiency. Lastly, fixed income investments, particularly investment-grade corporate bonds, offer modest overweight recommendations due to their yield pickup compared to government bonds.