Improving profit margins and firm commodity prices have led to an increase Russell Investments’ year-end target for the S&P/TSX Composite Index from 13,800 to 15,300 according to the firm’s Q3 2014 Strategists’ 2014 Global Outlook Update.

“Our upgrade is not necessarily a reflection of being more or less bullish; rather, it’s a reflection of improving profit margins,” said Shailesh Kshatriya, associate director, client investment strategies at Russell Investments Canada, who authored the Canada Market Perspective section of the global report.

“While this shift occurred sooner than we anticipated, we believe the improving outlook is being supported by several notable trends, including: rising oil prices, continued strong results from the banks, and market multiples — which have been aided by the strength in the energy and financial sectors.”

In addition, Kshatriya believes increased economic activity as the U.S. rebounds over the course of the year should also reinforce domestic trends.

“As such, we no longer expect multiples to contract for the balance of the year, but remain stable. And pertaining to economic growth, we expect it rebounds from weak Q1 levels, finishing the year between 2-2.3%.”

At the same time, Kshatriya believes the market is susceptible to a mild correction before it moves forward, and remains cautious in the interim.

In terms of the direction of the loonie, Kshatriya believes the Canadian dollar is in a losing battle and has tightened the fair-value range for the exchange rate to 0.89-0.94 cents US, versus the prior range of 0.90-0.98 cents US.

According to Kshatriya, the days of the Canadian dollar trading near parity to the U.S. dollar are over, and the loonie most likely needs to be lower for longer in order to improve competitiveness and add some life to the fading manufacturing sector.

For the global equity markets overall, Russell’s global team of investment strategists maintain their point of view stated in the 2014 Annual Global Outlook — a modest preference for equities over fixed income globally — though with a slightly diminished spread for the U.S. market. However, the combination of volatility near all-time lows (as measured by the VIX Index), investor complacency and stretched equity market valuations, is leading them to caution that the markets are especially vulnerable to shocks.

“We’re calling current market conditions the ‘great re-moderation’ as they appear similar to the low-volatility, high-return markets we saw prior to the 2008 global financial crisis,” said Russell’s global head of investment strategy, Andrew Pease. “This time though, we think recession risks are low and a major market reversal seems unlikely. However, volatility could easily spike, creating a temporary shake-out, which we’d see as a ‘buy-the dips’ opportunity.”