The real story behind Canada's lagging stock market

financialpost.com:

The Canadian stock market has been woefully underperforming its U.S. counterpart, but the reason has more to do with sector concentration — Canada is filled with banks and resource-related stocks while the United States is replete with technology and health care — than any commentary about how Corporate Canada is really doing.

If the TSX/S&P composite index enjoyed the same growth orientation in terms of sector shares as is the case with the U.S., the performance gap would be far less dramatic. For investors in the Canadian market, this means that until such time as value stocks begin to outpace the growth universe, the prudent thing is to overweight the smaller sectors with better growth and valuation profiles (technology, staples, industrials and health care) and underweight the rest.

We analyzed the contribution of each sector to the headline index and how it would have looked had the S&P/TSX composite index mimicked the weightings of the S&P 500. The underperformance by the S&P/TSX composite comes despite favourable valuations, trading at a 12-month forward P/E of 14.3x and a 6.4 multiple point discount to the S&P 500 (the long-term differential is 1.6 points).

The big difference between the two comes down to the “old” economy versus “new” economy stocks. Technology and health care make up 43 per cent of the S&P 500 (versus nine per cent in the S&P/TSX composite), while financials and energy account for 48 per cent of the composite (compared to 16 per cent for the S&P 500). Simply put, the composite index is more cyclical/value-oriented, while the S&P 500 is tilted toward growth.

Since the October 2022 lows, equity markets have been in an environment where growth has outperformed, but despite the valuation