The S&P/TSX composite index is expected to reach a record-high of 15,000 by the end of next year, courtesy of soaring energy prices, CIBC World Markets Inc. predicted today.

The revised S&P/TSX composite index targets imply that stocks will continue to outperform bonds, posting total returns of about 23% this year and 13% in 2007.

To date, the 8.5-percentage-point overweight in the energy sector has accounted for almost half of the CIBC World Markets portfolio’s 90-basis point outperformance of the TSX benchmark.

According to the report, crude prices are expected to average US$77 per barrel over the second half of this year and US$90 per barrel next year. The earnings from rising oil and natural gas prices and a further expansion in cash flow multiples should drive the TSX energy sector to 5,400 by the end of next year. Including a nearly 2.5% dividend yield, total returns from the energy sector are expected to be just under 50% this year, followed by a 25% return in 2007.

As a result, Jeff Rubin, chief strategist at CIBC World Markets, is raising his stock weighting a further two percentage points to 60%, a 10-percentage point overweight vs the CIBC World Markets institutional all-asset benchmark.

“As an interim step toward the 2007 target, CIBC World Markets is raising its 2006 target for the S&P/TSX composite index by 400 points to 13,600,” Rubin notes in this month’s CIBC World Markets Canadian Portfolio Outlook Report. “Exploding energy prices should drive much of the gain in the stock market both this year and next.”

In light of recent gains in both bullion and base metal prices, Rubin also raised his weightings in the materials GICS by half a percentage-point, bringing the overweight position to 2.5%. Bullion has broken through previous targets and is likely heading towards a price of US$675-$700 per ounce by year-end. Even if base metals prices simply stay where they are, metal stocks are currently undervalued.

With bond yields backing up, Rubin is reducing his weighting in utilities by a half-point to accommodate the added exposure to material stocks. The portfolio remains double-weighted income trusts, which have weathered a 50-bps increase in long Canada bond yields. Distributions remain healthy and with an almost-50% weighting in the energy sector, the trust market is heavily levered to further increases in oil and natural gas prices.