With European sovereign debt concerns and political gridlock in the United States likely keeping markets volatile in the weeks ahead, economists at National Bank Financial say they are maintaining a market-neutral weighting in equities.

In a research note, NBF notes that while equity markets “tend to react well” when the U.S. Federal Reserve Board stimulates the economy via expansionary monetary policy, the negative effect on the value of the U.S. dollar relative to most currencies “will offset U.S. equity-market gains in Canadian dollars.”

However, the devaluation in the U.S. greenback should also boost commodity prices, which “will favour resource-heavy equity markets like Canada’s,” NBF adds.

That said, NBF is maintaining its neutral weighting in equities. “With Washington in possible gridlock and European sovereign debt back in the spotlight, persistent uncertainty is likely to keep markets volatile in the coming weeks,” NBF says.

It also continues to lean heavily to resource stocks. “Over the past couple of weeks earnings [in the materials sector] have been revised up more than those of any other S&P/TSX sector, strongly outpacing revisions for the index as a whole,” NBF says. “This is largely due to the recent run-up in metals prices.”

Within the materials sector, NBF continues to favour gold stocks, “since we expect the price of bullion to remain buoyant for an extended period.”

NBF is not as bullish on overall corporate earnings. “We expect growth rates for both sales and earnings to slow from the robust pace of the last few quarters, especially in the United States,” it says. NBF adds that the consensus 12-month outlooks are very upbeat, calling for 26.8% earnings growth for the S&P/TSX, and 14.5% for the S&P 500. “Our own view is more conservative. We expect earnings growth of 15.5% for the S&P/TSX and 9% for the S&P 500,” it says.

IE