The recent weakness in stocks marks a buying opportunity according to David Watt, senior economists at BMO Nesbitt Burns.

In a research brief released Friday, Watt noted that, since the start of the month, stock markets have been stung by some unexpectedly soft global economic data, strong oil prices, fears about the sustainability of the recovery, and heightened geopolitical tensions. The result, he said, has been the first significant pullback in stocks in the past year.

However, Watt said Nesbitt’s equity valuation models are unanimous in suggesting that stocks are undervalued relative to bonds. “According to our models, the recent stock market corrections in both the U.S. and Canada should prove to be temporary setbacks, as the environment remains favourable toward equities,” he said. “On balance, the concerns weighing on stocks will likely prove to be short-lived.”

“In the U.S., forward earnings yields are rising, as the outlook for profits improves. Factor in the decline in bond yields, and the outlook for the S&P 500 is quite positive,” he added. “In Canada, the recent improvement in the S&P/TSX’s valuation profile is largely the result of falling bond yields. However, a sharp bond market selloff seems unlikely in the near-term, particularly with the Bank of Canada poised to ease further.”

“With global growth reviving, profits solid, inflation low, and interest rates plumbing the depths, the fundamental outlook for stocks in both Canada and the U.S. remains positive. The recent sell-off appears to provide an opportunity for the intrepid investor,” Watt concluded.