Stan Wong, portfolio manager at Scotia Wealth Management

FOCUS: North American large caps, ETFs

MARKET OUTLOOK:

Global equity markets have experienced a remarkable rally over the past several months, defying expectations of a potential economic slowdown or recession. Despite concerns about elevated inflation and higher interest rates, equities have demonstrated resilience, with the MSCI World Index posting double-digit gains year-to-date. The surprising strength of the U.S. economy, characterized by tempered inflation rates and sustained economic growth, has been a key driver of this bullish sentiment. Near-decade-low unemployment rates have also bolstered consumer spending and corporate earnings growth.

At The Stan Wong Group, we maintain an optimistic outlook for equity markets as the year progresses. The prospect of global central banks, including the U.S. Federal Reserve and the Bank of Canada, easing monetary policy has lifted market sentiment. As inflation cools, central banks should pivot towards a more accommodative monetary stance, providing a tailwind for risk assets. Additionally, the surge in U.S. money market fund assets past the US$6 trillion mark suggests potential for further stock gains. As interest rates fall in the future, the yields on money market funds will likely decline, encouraging investors to potentially shift some cash holdings into higher-returning stocks.

While the overall market outlook appears moderately bullish due to positive earnings growth, reasonable valuations, and central bank support, risks do remain. Investor exuberance over the artificial intelligence (AI) space and the broader technology sector carries potential risks that should not be overlooked. While the AI revolution presents immense opportunities, excessive optimism and unrealistic expectations could lead to market volatility and pullbacks. Persistent inflationary pressures may also prompt central banks to maintain tighter monetary policies, thereby weighing on economic growth and sentiment. Despite these risks, the current environment suggests the potential for further market gains, albeit with occasional setbacks. Indeed, a balanced, long-term and diversified approach, coupled with disciplined risk management, is crucial to effectively navigating inherent market volatility.

In Stan Wong Managed Portfolios, our focus remains on identifying high-quality, secular growth companies to strengthen our portfolio mandates. We favour sectors including health care, consumer discretionary, financials, and technology, provided valuations are reasonable. Geographically, our equity allocation comprises approximately 55 per cent U.S. equities, 30 per cent Canadian equities, and 15 per cent international equities. Within our fixed income allocation, we favor government and investment-grade corporate bonds with both short and medium durations. Overall, our strategic allocation aims to enhance returns while prudently managing risk for our clients.

TOP PICKS

AMAZON.COM INC (AMZN NASD)

With nearly US$640 billion in projected 2024 revenue, Amazon continues to be a dominant force in e-commerce, cloud services, digital streaming and artificial intelligence. Boasting over 200 million subscribers globally, Amazon's Prime membership program drives loyalty and recurring revenue. Additionally, Amazon Web Services (AWS) leads the rapidly growing cloud computing market, providing a solid foundation for growth. Moreover, the Company’s high margin advertising business continues to scale quickly and should enhance profitability in the coming years. Amazon's strong balance sheet and impressive free cash flow generation provides flexibility for investments, buybacks, or dividends, underpinning long-term growth. With artificial intelligence (AI), Amazon is capitalizing on AI’s transformative potential by incorporating AI strategies spanning its hardware, software, and cloud segments. With a clear uptrend channel of higher highs and higher lows, AMZN shares have been outpacing the broader S&P 500 Index since the beginning of 2023. Amazon is forecasted to achieve an annual earnings growth rate of almost 30 per cent over the next several years. The Company reports its next quarterly results on August 2nd.

CONSTELLATION BRANDS (STZ NYSE)

Constellation Brands is a leading wine, beer, and spirits company with over US$10.5 billion in forecasted fiscal 2025 revenue. The company boasts a brand portfolio of high-end beer, wine, and spirits that are well-positioned to benefit from favorable consumer trends. One of the key strengths of Constellation Brands is its exposure to the fast-growing beer category, particularly Mexican imports like Corona and Modelo. Additionally, the company is poised to benefit from the premiumization trend, where consumers are increasingly trading up to higher-end, more expensive alcoholic beverages. Longer-term, this trend is expected to continue, driving growth for the company. The Company generates strong free cash flow, which it uses for shareholder returns through dividends and buybacks. Management announced a new US$2 billion share buyback program last November and raised its quarterly dividend by 13 per cent in April 2024. STZ shares present an attractive opportunity for investors, trading down about 10 per cent below recent highs and near its 200-day moving average. Longer-term, Constellation Brands offers investors an exceptional combination of steady earnings and decent growth potential. Constellation Brands is forecasted to achieve an annual earnings growth rate of more than 11 per cent over the next several years The shares offer investors a 1.6 per cent dividend yield and the Company is scheduled to report its next quarterly results on July 3rd.

MASTERCARD (MA NYSE)

With projected 2024 revenue of nearly US$28 billion, Mastercard is the second-largest global digital payments company in the world, operating in over 210 countries and in more than 150 currencies. Mastercard is well-positioned to benefit from several favorable secular trends in the payments industry, including the shift from cash to electronic payments, the growth of e-commerce, and the increasing adoption of mobile payments. As consumer spending and global trade continue to grow, Mastercard's transaction volumes and revenues should expand as well. The Company has a solid balance sheet and generates strong free cash flow, allowing it to invest in growth, make strategic acquisitions, and return capital to shareholders through dividends and buybacks. Last December, management announced a new US$11 billion share buyback program and raised its dividend by 16 per cent, demonstrating its commitment to enhancing shareholder value. MA shares have been outpacing the broader S&P 500 Index since late-2021. The shares look compelling today, trading down about 10 per cent from recent highs and near its 200-day moving average. Mastercard is forecasted to achieve an average annual earnings growth rate of more than 15 per cent over the next several years. The Company reports its next quarterly results on July 26th.

PAST PICKS: JUNE 12, 2023

ALPHABET (GOOGL NASD)

Then: US$123.64
Now: US$176.30
Return: 42%
Total Return: 42%

ASML HOLDING N.V. (ASML NASD)

Then: US$730.17
Now: US$1041.33
Return: 43%
Total Return: 44%

STARBUCKS (SBUX NASD)

Then: US$98.46
Now: US$81.62
Return: -17%
Total Return: -15%

Total Return Average: 24%