October has not been kind to Canadian stock markets, but National Bank Financial cautions that there could be more downside to go.

This year, the S&P/TSX has experienced its worst October start since 1971 with a drop of almost 5%, NBF reports. “Is this a buying opportunity? Of course a technical rebound is possible, but on a longer term horizon, there might be more downside,” it says, noting that its 12-month target is unchanged at 9600.

“Despite the current pullback, the S&P/TSX is still up about 13% year-to-date while the S&P 500 is down close to 3%,” NBF observes, adding that over the past three years, the Canadian market outperformed the U.S. market by 68%, “a performance only matched by the 1979 oil shock, which did not last very long.”

“It is worth noting that at the time, the energy sector weight in the index stood at 27%, similar to the current level. Fuelled by commodities prices, Canadian earnings already represent a record share of the economy — a level that is significantly above that in the U.S.,” it says.

“Using the past as a guide, such an out-performance of Canadian earnings and the TSX does not last very long, particularly if U.S. consumers react badly to a rising energy bill and higher interest rates,” it concludes. “If Canadian earnings have peaked as we believe, investors should be patient before redeploying available sidelined cash.”