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Toronto market seen higher if economic downturn not too severe: Reuters Poll

FILE PHOTO: The facade of the original Toronto Stock Exchange building is seen in Toronto

By Fergal Smith

TORONTO (Reuters) - Canada's main stock index will rally in the coming year and move to a record high in 2024 as inflation pressures ease and provided an anticipated slowdown in the domestic economy is not too deep, a Reuters poll found.

Over the next six months, however, most analysts who answered a set of separate questions expected corporate earnings to worsen as the economy weakens and begins to digest a rapid-fire series of interest rate hikes from the Bank of Canada.

The median prediction of 21 portfolio managers and strategists was for the S&P/TSX Composite Index to advance nearly 8% to 22,000 by the end of 2023, compared with 21,000 expected in the previous poll in August.

It was then expected to climb to 23,000 by the middle of 2024, moving past the record closing high of 22,087.22 it set on March 29 this year.

"If the downturn doesn't prove to be severe, equity markets could stabilize even as economic data and earnings underwhelm," said Angelo Kourkafas, an investment strategist at Edward Jones in St. Louis, Missouri.

The Bank of Canada has forecast the economy will grow less than 1% next year after it hiked interest rates to a 14-year high of 3.75% to tackle soaring inflation.

Canada's economy is likely to be particularly sensitive to higher rates after households borrowed heavily during the pandemic to participate in a red-hot housing market.

But some recent data has pointed to a peak in price pressures, while the BoC has opened the door to a slower pace of tightening.

"We think a trend of moderation in inflation will be established in the coming quarters, which will enable the BoC to pause, which in turn will remove the upward pressure on bond yields," Kourkafas said.

Canada's 10-year yield, a benchmark for Canadian corporate borrowing costs, has more than doubled this year to 2.94%.

The Toronto market has fallen around 4% since the start of the year but that's much less than some other major markets, due in part to a heavy weighting in energy stocks. The index is up about 14% since mid-October.

"While corporate earnings will likely continue to decline for many industries, we see continued growth in earnings across most commodities," said Arthur Salzer, chief executive officer of Northland Wealth Management.

Adding to investor enthusiasm, the TSX last Wednesday closed above the 200-day moving average for the first time since May 4.

"With the TSX Composite now through important technical resistance ... we have now begun a new bull market for Canadian stocks," said Brandon Michael, senior investment analyst at ABC Funds.

(Other stories from the Reuters global stock markets poll package:)

(Reporting by Fergal Smith; polling by Susobhan Sarkar and Sarupya Ganguly)