Canaccord Capital economist Michael Manford is calling for a strong rally in the stocks comprising the TSE 300.

In a research note published yesterday , Manford suggested that, apart from technology stocks, “the TSE 300 is very, very cheap. In fact, earnings could drop by as much as 7.5% over the next three years and still justify today’s prices. We expect the non-tech industrial area, consumer stocks, and by fall, the commodity plays to drive the TSE 300 up to the 9,550 area by the spring.” That’s about a 28% gain from the TSE 300’s current level. He said tech stocks are also like to rise, but only by about 10% to 20%.

In the United States, Manford said markets will be choppy in the short run. “However, once the recovery finally sets in, long-term rates should run up into the 6-6.5% area in early 2002. The S&P 500 is under its fair value levels by as much as 8%-9%. Moreover, with the economy bottoming, earnings should stabilize in the third quarter and rise by 12%-15% over the next nine months. That should carry the S&P 500 to the 1,450 level by the spring, led by the old economy folks.”

Manford said that the U.S. economy is giving off signs that the non-tech areas have bottomed out. He expects real consumer spending to advance by a decent 2.5% pace in the third quarter and 3% in the fourth quarter, with real GDP rising by about 2% in the third quarter and 3.5% in the fourth, as inventories finally turn.

“We expect that when the Fed goes again, it will be the last move as the economy has begun to respond to what is an unprecedented amount of stimulus. At the time of writing, the odds of a cut in October are likely less than 50/50. Long-term rates have dropped to what has to be called extremely low levels.”

Based on the view that the U.S. has bottomed, Manford says, “we should see Canadian exports back on a growth path very soon. That should have employment growth restarted by October. As exports rebound, we should see real GDP rise by about 1.5% in the third quarter and 3-3.5% in the fourth. The weakness of the Canadian economy will likely allow the Bank of Canada to ease rates by at least 25 basis points in the fall. Long-term rates should basically follow their U.S. counterparts over the near term and back up into the 6.5% area by late winter.”