National Bank Financial is raising its target for the S&P/TSX composite index, but is also sticking with its cautious view on Canadian stocks, despite a strong market performance so far this year.

The firm today raised its 12-month target for the index to 9600 and also lifted its S&P/TSX earnings outlook for 2005 and 2006. It says that the target revision implicitly recognizes that its early January concerns were premature, yet it remains worried about the U.S. Fed’s ability to achieve a soft landing of the exuberant housing market.

NBF in January scaled down its 12-month target for the S&P/TSX to 8600 from 9500 and recommended — for the first time in 18 months — an underweighting of resource stocks.

However, the Canadian benchmark index is up almost 15% since then, led by a 50% surge in energy stocks, it notes. “At this stage of the year we must address the following question: Were we just plain wrong in our tactical move on Canadian equity exposure or were we too early in our concerns?

“We recognize that the current international environment (Chinese industrialization, U.S. desire for reliable energy supply) is very bullish for Canadian assets,” it says. “Since the price of oil has increased US$17 since early January and Canadian long rates have declined 43 basis points, our downgrade of Canadian equity exposure to underweighted was ill-timed to say the least.”

Nonetheless, the firm says, “since U.S. consumers are China’s most important customers, we remain concerned about the domino effect on the Chinese economy and on commodity prices of a more restrictive monetary policy. For this reason we maintain our underweight stance on Canadian equities and suggest that our clients not feel too guilty about taking profits. Past experience (real estate in 1988-90, golds in 1993, Nortel in the late 1990s) suggests that good sector and geographic diversification is much better than always trying to match or beat the Canadian equity benchmark.”