investment strategy 2021 market outlook

November 19, 2020

Investment Strategy

2021 Market Outlook

Brian G. Belski Chief Investment Strategist BMO Capital Markets Corp. 212 -885 -4151 [email protected]

Nicholas Roccanova, CFA Sr. Investment Strategist BMO Capital Markets Corp. 212 -885 -4179 [email protected]

Ryan Bohren, CFA Investment Strategist BMO Nesbitt Burns Inc. 416 -359 -4993 [email protected]

Andrew Birstingl Associate BMO Capital Markets Corp. 212 -885 -4172 [email protected]

This report was prepared in part by an analyst(s) employed by a Canadian affiliate, BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst’s Certification, please refer to pages 32 to 34. ~16:05 ET

mailto:[email protected]




2021 Market Outlook

Another Year of the Unprecedented Bull

Not to state the obvious, but there was no template or historical playbook when it came to forecasting

the stock market, let alone investing in 2020. One of the traps and/or tools of the trade of investment

strategy is to look to the past to provide potential guideposts for future activity. While historical analysis

is certainly helpful during periods of normalized performance, earnings growth, valuation metrics and

macro conditions– 2020 was far from normal. To be sure, 2020 was a year that will go down in the

history books for far too many important and obvious reasons relative to the world. As such, it is safe to

say that personal and professional lives intertwined more than any time in history in 2020, in our view.

Therefore, periods of heightened emotion, fear, rhetoric and overreaction clearly impacted decision-

making in both habitats, helping to define one of the most unprecedented stock market periods in

history. Granted, a once-in-a-century global pandemic, a month-long cyclical bear market, massive

amounts of fiscal stimulus and Fed intervention, a compressed recession and a contentious US

presidential election tend to rattle the cages. All of this only fueled the preponderance of negativity that

has surrounded Wall Street for most of the past 20 years. In fact, we believe this “pre-destined

negativity” has never been more evident than during the depths of the global pandemic chaos in 1Q,

leading up to a “pessimistic crescendo” thanks in part to the election fiasco, and likely another wave of

the pandemic in 4Q. Moreover, the need to make “the call” by investors and pundits alike was never

more prevalent in 2020 (e.g., calls for the next great depression, negative interest rates, value over

growth, cyclicals and small cap revival to name a few). Such behavior led many investors we interact

with to make excessively binary decisions, tactics that lacked process, discipline and most of the time

facts and analysis, in our view. Unfortunately, behaviors are hard to unwind – and will likely continue to

define stock market trends for several more quarters, if not years. As such, we believe the believability

factor of the bull market will once again be in question in 2021. While sharp price moves will

undoubtedly be defined by continued investor indecision and lack of commitment, we believe the

majority of apprehension will center on the validity of unprecedented earnings growth as fundamentals

more broadly recover from the depths of 2020. Therefore, investors should brace themselves to rely less

on traditional variables or models and be prepared to incorporate some more unconventional methods

to value and assess the market overall.

Unprecedented Ingredients Beseech Unrivaled Results Again in 2021

Even with recent positive vaccine and treatment developments, the global pandemic and its

unprecedented impact is unlikely to fade in coming months. As such, the massive fiscal and monetary

response in the US and around the world (also unprecedented) will likely remain in place to combat its

negative economic impact for the foreseeable future. Such environments have historically supported

continued stock market gains and we see no reason why 2021 will be any different. Yes, valuations

appear stretched at first glance, but they also need to be considered within the context of historically

low interest rates and little inflation, ingredients that are likely to persist throughout 2021 and beyond,

in our view. When viewed through this lens, we believe it is not unreasonable for market valuation to

sustain (or even expand slightly) from its current level. In addition, we believe corporate earnings

growth is poised to recover sharply from pandemic lows, particularly during 2H, since much of the

damage was lockdown specific and not necessarily related to companies themselves. In fact, aside from

the global financial crisis, 2020 represented the swiftest quarter-over-quarter earnings collapse for the

S&P 500 where index EPS plummeted nearly 50% during 1Q. Thus, we anticipate that 2021 has the

potential to be one of the best years ever in terms of earnings growth, something we believe will also

help to push stock prices higher.

Investment Strategy | Page 1 November 19, 2020

S&P 500 Price Target 4,200; EPS target $175

We remain optimistic and expect another year of double-digit gains as the economy and society slowly

transition back to normal. As such, we forecast that the S&P 500 will rise +15% (from our 3,650 2020

year-end target) and reach 4,200 by 2021 year end. Our expectation is based on the assumptions of a

continued low cost-of-equity rate (DDM model) and a higher-than-normal market multiple (PE model) – both of which we reconcile with an expectation for interest rates to remain historically low for the

foreseeable future. In addition, massive fiscal and monetary responses add another layer of strong

support for continued stock market gains (Exhibits 2-4), in our view.

On the earnings front, we forecast $175 for 2021 S&P 500 EPS, an almost 35% jump from the pandemic-

depressed 2020 level. Our expectation assumes that companies will build on the earnings recovery

displayed in recent quarters, as more areas of the economy adapt and get closer to normal levels of

activity throughout the year. In addition, we also believe current consensus earnings expectations are

too conservative, setting up the potential for significant upward surprise in the coming quarters – similar

to how the recently reported 3Q has transpired.

Baseline Assumptions

One or more effective vaccines become publicly available sometime during 1H

At least one more round of fiscal stimulus in the ~ $1 trillion range

Policy uncertainty (particularly on the trade front) declines

Yield curve continues to steepen as 10-year Treasury rate drifts higher, but stays below 1.5%

Exhibit 1: 2021 S&P 500 Targets

Price Target

Model Category 2021E

Dividend Discount Model Fundamental 4,250

Fair Value Price-to-Earnings Model Valuation 4,150

Expected Return* 17.7% Latest S&P 500 Close 3,568 Price Target 4,200

Earnings Per Share Target

Model Category 2021E

Macroeconomic Regression Model Macro $160

Bottom Up Mean Consensus Expectation Fundamental $165 Normalized EPS Mean Reversion $179

Expected EPS Growth 34.6% Prior Year S&P 500 EPS** $130 EPS Target $175

Implied P/E 24x

Source: BMO Investment Strategy Group. *Based on 11/18/2020 closing price. **Based on our prior-year EPS target if EPS is not fully reported for index.


Exhibit 2: S&P 500 Price Performance Following Enactment of Fiscal Stimulus Annualized Return

Date Enacted Fiscal Stimulus Bill +1M +3M +6M +12M +2Y +3Y +5Y

6/6/1932 Revenue Act of 1932 -9.3% 75.7% 35.5% 98.0% 38.6% 24.7% 26.3%

8/30/1935 Revenue Act of 1935 3.1% 15.1% 29.9% 41.6% 19.8% 2.3% -1.4%

2/20/1946 Employment Act of 1946 1.2% 7.3% 3.1% -9.5% -10.4% -5.2% 4.6%

2/26/1964 Revenue Act of 1964 1.7% 3.2% 4.4% 12.3% 8.2% 3.9% 4.8%

3/29/1975 Tax Reduction Act of 1975 2.1% 13.1% 1.4% 22.1% 9.0% 2.3% 3.7%

8/13/1981 Economic Recovery Tax Act of 1981 -8.9% -8.9% -14.3% -22.2% 10.2% 7.4% 13.0%

6/7/2001 Economic Growth and Tax Relief Reconciliation Act of 2001

-6.8% -15.0% -9.3% -19.5% -12.0% -3.7% -0.3%

5/28/2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 2.4% 5.2% 11.0% 17.6% 12.1% 10.3% 7.8%

2/13/2008 Economic Stimulus Act of 2008 -3.8% 2.6% -6.0% -39.5% -11.3% -0.9% 2.1%

2/17/2009 American Recovery and Reinvestment Act of 2009 -1.4% 11.9% 24.1% 39.3% 30.3% 19.9% 18.4%

12/17/2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

4.0% 2.4% 2.2% -1.9% 7.2% 12.7% 10.4%

1/2/2013 American Taxpayer Relief Act of 2012 3.5% 7.4% 10.4% 25.3% 18.6% 11.8% 13.0%

12/22/2017 Tax Cuts and Jobs Act of 2017 5.6% -1.5% 2.7% -9.9% 9.6% 10.1% 6.0%

3/27/2020 CARES (Coronavirus Aid, Relief, and Economic Security) Act

13.3% 18.4% 29.8%

Average (excludes current fiscal stimulus) -0.5% 9.1% 7.3% 11.8% 10.0% 7.4% 8.4%

Min -9.3% -15.0% -14.3% -39.5% -12.0% -5.2% -1.4%

Max 5.6% 75.7% 35.5% 98.0% 38.6% 24.7% 26.3%

Median 1.7% 5.2% 3.1% 12.3% 9.6% 7.4% 6.0%

Source: BMO Capital Markets Investment Strategy Group, FactSet, FRB, Treasury.

Exhibit 3: S&P 500 Price Performance Following Final Rate Cut of Cycle Annualized Return

Start of Fed Easing Campaign

End of Fed Easing Campaign Easing Cycle (months) +1M +3M +6M +12M +2Y +3Y +5Y

11/4/1987 2/10/1988 3.3 2.8% 0.4% 2.0% 13.8% 14.0% 11.9% 11.7%

6/6/1989 9/4/1992 39.5 -1.6% 3.6% 7.3% 10.6% 6.3% 10.6% 17.4%

7/6/1995 1/31/1996 7.0 0.7% 2.9% 0.6% 23.6% 24.1% 26.2% 16.5%

9/29/1998 11/17/1998 1.6 3.6% 7.4% 17.6% 23.8% 9.6% 0.0% -1.7%

1/3/2001 6/25/2003 30.1 2.4% 2.9% 12.2% 16.3% 10.5% 8.5% 6.3%

9/18/2007 12/16/2008 15.2 -6.9% -17.4% -0.1% 21.5% 16.7% 10.1% 14.4%

8/1/2019 3/16/2020 7.6 17.3% 31.0% 41.9%

Average 2.6% 4.4% 11.6% 18.3% 13.5% 11.2% 10.8%

Min -6.9% -17.4% -0.1% 10.6% 6.3% 0.0% -1.7%

Max 17.3% 31.0% 41.9% 23.8% 24.1% 26.2% 17.4%

Median 2.4% 2.9% 7.3% 18.9% 12.3% 10.3% 13.0%

Source: BMO Capital Markets Investment Strategy Group, FactSet, FRB.

Exhibit 4: S&P 500 Price Performance Following Announcement Date of Monetary Stimulus Annualized Return

Announced Date End Date Description +1M +3M +6M +12M +2Y +3Y +5Y

2/2/1961 12/31/1965 Operation Twist 2.5% 5.4% 7.4% 12.1% 3.2% 7.3% 8.2%

11/25/2008 3/31/2010 QE1 1.3% -10.8% 3.5% 29.5% 18.2% 10.6% 16.0%

11/3/2010 6/30/2011 QE2 2.2% 9.1% 13.2% 5.3% 8.7% 13.7% 12.0%

9/21/2011 12/31/2012 Operation Twist 6.1% 6.6% 20.2% 25.1% 21.1% 19.9% 13.1%

9/13/2012 10/29/2014 QE3 -2.2% -2.8% 6.5% 15.6% 16.6% 10.3% 11.3%

3/16/2020 ??? QE4 / QE Infinity 17.3% 31.0% 41.9%

Average (excludes current QE) 2.0% 1.5% 10.2% 17.5% 13.5% 12.4% 12.1%

Min -2.2% -10.8% 3.5% 5.3% 3.2% 7.3% 8.2%

Max 6.1% 9.1% 20.2% 29.5% 21.1% 19.9% 16.0%

Median 2.2% 5.4% 7.4% 15.6% 16.6% 10.6% 12.0%



Three Keys to 2021 Positioning – Transition to Normal is Under way, but It Will Not Be a Straight Line

Exhibit 5: Momentum Driving Market for Now

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019 -0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

+1 stdev

S&P 500 Momentum Index vs S&P 500 %Y/Y

Source: BMO Capital Markets Investment Strategy Group, FactSet, S&P.

1. Less Binary = Less Momentum

According to our work, the market has become increasingly

binary and momentum driven. In fact, the S&P 500

Momentum index has sharply outperformed the broader

market over the last year and is currently outpacing the S&P

500 by more than one standard deviation.

We believe one of the first key signs of a return to normalcy

will see the market move away from this binary and

momentum-based performance toward broader fundamental

investing.

Exhibit 6: Growth Has Become Concentrated

S&P 500 - % Stocks EPS Growth > Market 80%

70%

60%

50%

40%

30%

20%

10%

0%

-1 stdev

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES.

2. More Fundamental = Less Macro Monetary & Fiscal

Dependence

While US stocks have certainly been influenced by prospects

of further monetary and fiscal policy in recent months, we

believe the market will likely need to see a broadening out

of fundamentals before returning to more fundamental

strategies. As such, we believe this is the second key sign of

a return to normalcy.

With less than 40% of S&P 500 companies exhibiting EPS

growth greater than that of the market, we would like to see

improved earnings breadth in order to gain confidence that

the market is returning to normal.

Exhibit 7: Narrow Performance Trends

S&P 500 - %Y/Y Price Return vs. % Stocks with Positive % Y/Y Price Return

120% % Stocks Positive %Y/Y (lhs) 60%

100% 40%

80% 20%

60% 0%

40% -20%

20% -40%

0% -60%

S&P 500 %Y/Y (rhs)

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Source: BMO Capital Markets Investment Strategy Group, FactSet.

3. Broadening Market Performance = Healthy Longer-

Term Profile

According to our work, less than 50% of S&P 500 stocks are

posting positive returns on a year-over-year basis although

the S&P 500 is up almost 10% over this period. Indeed, this

suggests a significant concentration in performance.

As such, as we head into 2021 we would look to see a

broadening out of performance as the third key to normalcy.

In fact, our works show broader performance is directly

associated with healthy double-digit market returns.


2020’s Role in the Secular Bull Market

March 23, 2020 – The Crescendo That Reignited the Secular Bull

Not to evoke the obvious, but 2020 is sure to be remembered for its unrivaled conditions with respect to

equity investing, let alone life itself. For our part, we did not allow multiple volatile and uncertain inputs

deter us from our 20-year secular bull market stance. To that end, we believe the secular bull market is

alive and well. As a reminder, we originally made this prediction back in 2010 under intense skepticism

from investors and have remained steadfast in our call ever since. With that said, it is important to keep

in mind that stock prices rarely ascend in a straight line throughout the duration of bull markets. Price

declines and periods of volatility are bound to occur. In the context of the current secular bull market,

we believe March 23, 2020, represented the reset (ctrl-alt-delete) between the unprecedented cyclical

bear that occurred in parts of February and March, and the next 10 years of our secular bull market call.

As we look toward the second half of the bull, leadership, composition, and investment strategies with

respect to portfolio management will almost certainly change. For instance, we believe a more

disciplined approach to investing (stock picking) will likely take hold, especially relative to the reliance

on macro and quantitative tactics that have defined the majority of portfolios over the past 10-15 years.

And while the second half of the bull is sure to be different than the first half, we believe it will

continue to equally torment the naysayers and perpetual haters just as the first half did.

Exhibit 8: S&P 500 Price and Key BMO ISG Reports

S&P 500 Daily Price letters and dates are BMO ISG report callouts from Exhibit 10

3800

A: 11/21/19

C: 4/24/20

D: 5/29/20

F: 8/28/20 3600

3400

3200 E: 7/30/20

3000

2800

2600

2400

2200 B: 3/23/20

2000

11/

19

12/

19

01/

20

02/

20

03/

20

04/

20

05/

20

06/

20

07/

20

08/

20

09/

20

10/

20

11/

20


Exhibit 9: Path of the Secular Bull Market on Track

Normalized S&P 500 Price Performance of Secular Bull Markets

indexed to 1; monthly data 1514 1312 11 10 9 8 7 6 5 4 3 2 1

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

years into secular bull cycle

Cyclical Bear Markets 2009 - Current

1948 - 1968 1982 - 2000


Exhibit 10: Key BMO Investment Strategy Reports and Chart Callouts

Date Report Title Takeaway

A 11/21/19 2020 Market Outlook Initiated 3,400 S&P 500 price target

B 3/23/20 Coronavirus Positioning and the Next Bull Market Transition from the one month cyclical bear to the renewed bull market and the anticipated 40-50% rally; suspended 2020 targets, instead shifting to NTM forecasts

C 4/24/20 The Actual Earnings Number May Not Matter A recovery this fast to new all-time highs is not unprecedented

D 5/29/20 Don’t Fret Over Valuation Valuations are not that extreme when considered within the context of historically low rates and little inflation

E 7/30/20 US Presidential Elections and Stock Market Performance Market performance is about fundamentals and the economy; investors should avoid constructing portfolios around politics

F 8/28/20 Reinstating 2020 Market Targets 3,650 year-end 2020 target

Source: BMO Capital Markets Investment Strategy Group. Key: OW: Overweight, MW: Market Weight, UW: Underweight


https://researchglobal0.bmocapitalmarkets.com/research/cb7916e7-309e-44fa-b358-e939f4660367/

https://researchglobal0.bmocapitalmarkets.com/research/7a0ed907-2a85-4e3e-8621-ba4d59674d46/

https://researchglobal0.bmocapitalmarkets.com/research/8368c9f3-54f6-4bbd-b58b-2642add003ae/

https://researchglobal0.bmocapitalmarkets.com/research/35e94bb2-0983-4073-a5c2-4578a093bf66/

https://researchglobal0.bmocapitalmarkets.com/research/45eaa7e0-7158-429b-8330-3ab70d5daced/

https://researchglobal0.bmocapitalmarkets.com/research/f61f1ddd-e138-44a4-8a31-185f5ea50e1d/

Sectors, Size, and Style Recommendations

US Sector Opinions

Exhibit 11: US Sector Opinion Summary

Sector OpinionIndex

WeightTarget Weight BMO Investment Strategy Group Headline

Communication Services MW 11.0 11.0 Primary beneficiary of stay-at-home trade, which will have periods of outperformance; maintain positions

Consumer Discretionary OW 11.2 12.0 Sector performance, not unlike the market, likely to broaden as recovery matures

Consumer Staples MW 6.9 6.5 Focus on staples retailing; “hoard” names are expensive and could be source of funds for cyclical growth Energy UW 2.2 1.5 Secular decline intact; range-bound commodity and renewables focus are not supportive to higher prices

Financials OW 10.2 11.5 Combo platter of steeper yield curve + improving economy + lack of investor ownership = bullish

Health Care MW 14.1 14.0 Focus on products – biotech, drugs and devices; potential new regulations and policy are headwinds

Industrials OW 8.6 9.5 Primary beneficiary of cyclical earnings and economic recovery; best to balance international and domestic

Information Technology MW 27.4 27.5 Periods of outperformance likely to be more condensed; maintain longer-term positions; trim on spikes

Materials MW 2.7 2.5 Much of recovery is likely already priced in; prefer select base metals, paper and chemical > gold

Real Estate UW 2.6 2.0 Yield proxies likely to suffer; prefer REITs slightly > Utilities given economic sensitivity

Utilities UW 3.1 2.0 Yield proxies likely to suffer; prefer REITs slightly > Utilities given economic sensitivity


Key Sector Changes

Financials to Overweight from Market Weight

Industrials to Overweight from Underweight

Communication Services to Market Weight from Overweight

Information Technology to Market Weight from Overweight

Real Estate to Underweight from Market Weight

Utilities to Underweight from Market Weight

Exhibit 12: S&P 500 Annual Sector Performance Year COMSV COND CONS ENRS FINL HLTH INDU INFT MATR RELS UTIL SPX

1990 -17.7% -14.9% 12.4% -1.4% -42.1% 14.1% -10.2% 0.3% -13.9% -7.3% -6.6%

1991 7.9% 38.3% 38.4% 2.4% 43.8% 50.2% 26.0% 6.6% 21.5% 16.0% 26.3%

1992 11.0% 17.5% 3.0% -2.3% 19.8% -18.1% 6.8% 0.6% 7.2% 0.3% 4.5%

1993 10.8% 12.8% -6.3% 11.2% 7.8% -11.0% 15.8% 20.5% 10.5% 7.8% 7.1%

1994 -8.4% -9.9% 6.8% -0.4% -6.4% 10.2% -4.8% 19.1% 3.3% 17.2%- -1.5%

1995 37.3% 18.2% 36.2% 26.0% 49.6% 54.5% 35.9% 38.8% 17.3% 25.2% 34.1%

1996 -2.2% 10.5% 23.2% 21.7% 31.9% 18.8% 22.7% 43.3% 13.4% 0.2% 20.3%

1997 37.1% 32.3% 30.5% 22.0% 45.4% 41.7% 25.0% 28.1% 6.3% 18.4% 31.0%

1998 49.3% 39.6% 13.9% -2.0% 9.6% 42.3% 9.3% 77.6% -8.0% 10.0% 26.7%

1999 17.4% 24.1% -16.6% 16.0% 2.3% -11.6% 19.9% 78.4% 23.0% -12.8% 19.5%

2000 -39.7% -20.7% 14.5% 13.2% 23.4% 35.5% 4.5% -41.0% -17.7% 51.7% -10.1%

2001 -13.7% 1.9% -8.3% 12.3%- -10.5% -12.9% -7.0% -26.0% 1.0% -32.5% -13.0%

2002 -35.9% -24.4% -6.3% 13.3%- -16.4% -20.0% -27.6% -37.6% -7.7% -15.1% -33.0% -23.4%

2003 3.3% 36.1% 9.2% 22.4% 27.9% 13.3% 29.7% 46.5% 34.8% 20.8% 21.1% 26.4%

2004 16.0% 12.1% 6.0% 28.8% 8.2% 0.2% 16.0% 2.1% 10.8% 21.9% 19.6% 9.0%

2005 -9.0% -7.4% 1.3% 29.1% 3.7% 4.9% 0.4% 0.4% 2.2% 7.4% 12.8% 3.0%

2006 32.1% 17.2% 11.8% 22.2% 16.2% 5.8% 11.0% 7.7% 15.7% 36.8% 16.9% 13.6%

2007 8.5% -14.3% 11.6% 32.4% -20.8% 5.4% 9.8% 15.5% 20.0% -20.5% 15.8% 3.5%

2008 -33.6% -34.7% -17.7% -35.9% -56.9% -24.5% -41.5% -43.7% -47.0% -45.0% -31.5% -38.5%

2009 2.6% 38.8% 11.2% 11.3% 14.8% 17.1% 17.3% 59.9% 45.2% 20.8% 6.8% 23.5%

2010 12.3% 25.7% 10.7% 17.9% 10.8% 0.7% 23.9% 9.1% 19.9% 28.0% 0.9% 12.8%

2011 0.8% 4.4% 10.5% 2.8% -18.4% 10.2% -2.9% 1.3% -11.6% 7.9% 14.8% 0.0%

2012 12.5% 21.9% 7.5% 2.3% 26.3% 15.2% 12.5% 13.1% 12.2% 16.2% -2.9% 13.4%

2013 6.5% 41.0% 22.7% 22.3% 33.2% 38.7% 37.6% 26.2% 22.7% -1.5% 8.8% 29.6%

2014 -1.9% 8.0% 12.9% -10.0% 13.1% 23.3% 7.5% 18.2% 4.7% 26.1% 24.3% 11.4%

2015 -1.7% 8.4% 3.8% -23.6% -3.5% 5.2% -4.7% 4.3% -10.4% 1.2% -8.4% -0.7%

2016 17.8% 4.3% 2.6% 23.7% 20.1% -4.4% 16.1% 12.0% 14.1% 0.0% 12.2% 9.5%

2017 -6.0% 21.2% 10.5% -3.8% 20.0% 20.0% 18.5% 36.9% 21.4% 7.2% 8.3% 19.4%

2018 -16.4% -0.5% -11.2% -20.5% -14.7% 4.7% -15.0% -1.6% -16.4% -5.6% 0.5% -6.2%

2019 30.9% 26.2% 24.0% 7.6% 29.2% 18.7% 26.8% 48.0% 21.9% 24.9% 22.2% 28.9%

2020 16.5% 26.1% 5.9% -42.0% -11.3% 6.9% 7.0% 31.2% 13.1% -4.5% -1.1% 10.4%

Source: BMO Capital Markets Investment Strategy Group. Performance calculated through 11/18/20. REITs are used as a historical proxy for the Real Estate sector, which was officially established in Sept. 2016.


Overweight: Consumer Discretionary

Exhibit 13: Consumer Discretionary Sector Tends to Outpace Broader Market Once Recessions End

30% 26.0%

25%

20% 17.2%

15% 12.2%

10% 7.1% 8.8%

4.6% 5%

0% Next 6-Mos Next 12-Mos Following 12-Mos

Consumer Discretionary S&P 500

Average Price Performance Following Recessions: Consumer Discretionary vs. S&P 500

US recessions since 1973; COND sector prices prior to 1989 estimated based on weighted avg prices

Source: BMO Capital Markets Investment Strategy Group, FactSet, NBER.

Performance: Discretionary Typically Post Strong

Outperformance Following US Recessions

When examining US recessions since 1973, the Consumer

Discretionary sector has exhibited an average gain of 26% in

the 12 months following recessions, compared to an 8.8%

price return registered by the S&P 500 index.

In addition, price strength typically carries through to the

following year with the sector outpacing the overall market

by more than seven percentage points.

Exhibit 14: Consumer Discretionary Has Highest EPS LTG Forecast

EPS LTG (lhs) NTM PEG (rhs)30%

CON

D

4.0x

25% 3.5x

20% 3.0x

15% 2.5x

10% 2.0x

5% 1.5x

0% 1.0x

-5% 0.5x

-10% 0.0x

S&P 500 Sectors: EPS Long-Term Growth and NTM PEG Ratio

PEG ratio: NTM P/E divided by EPS LTG

COM

S

CON

S

ENRG

S

FIN

S

HLT

H

IND

U

INFT

MA

TRS

REA

L

UTI

L

SPX


Fundamentals: When Factoring in Long-Term EPS Growth

Expectations, Sector Has One of the Lowest PEG Ratios

While absolute and relative valuations for Discretionary

remain elevated according to our valuation composite model

(US Chartbook), the sector does not appear expensive when

factoring in long-term EPS growth.

Furthermore, the sector easily has the highest long-term EPS

growth forecast among S&P 500 sectors with Amazon being a

major driver of that feat. This puts the NTM PEG ratio for the

group well-below that of the market and one of the lowest

across the 11 GICS sectors.

Exhibit 15: US Consumer Market Conditions Have Improved

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

BMO US Consumer Market Indicator* measures standardized changes over rolling 1Y periods in

disposable income, nonfarm payrolls, jobless claims, consumer confidence, consumer credit, oil prices, home

prices, and stock prices

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Perspective: After a Sharp Drop During the Height of the

Pandemic, US Consumer Market Conditions Have

Rebounded Recently

After displaying its sharpest move into negative territory

since the Great Recession earlier in the year during the height

of the COVID-19 pandemic, our US Consumer Market Indicator

has markedly improved. In fact, it is sitting above zero for

four straight months now, a positive signal for future

personal consumption growth, not to mention Consumer

Discretionary relative performance, in our view.

*Levels above zero indicate accommodative conditions and signal future personal consumption growth, while levels below zero indicate restrictive conditions and potential deterioration in personal consumption growth. The model measures standardized changes over rolling one-year periods in the following metrics: disposable income, nonfarm payrolls, jobless claims, consumer confidence, consumer credit, oil prices, home prices, and stock prices.

Source: BMO Capital Markets Investment Strategy Group, Bloomberg, FactSet.


https://researchglobal0.bmocapitalmarkets.com/research/3b8470b0-38ef-4da6-93b1-7f626444f0de/

Overweight: Financials (Upgrading to Overweight From Market Weight)

Exhibit 16: Financials May Be Primed for Performance Reversal If Yield Curve Continues to Steepen

US 10Y/2Y Spread (lhs) FINS Relative Price (rhs)

1990

1992

1994

1996 -100

-50

0

50

100

150

200

250

300

350

US 10Y/2Y Treasury Constant Maturity Yield Spread and Financials Relative Price vs. S&P 500

spread in bps; monthly data

0.40

0.35

0.30

0.25

0.20

0.15

0.10

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020


Perspective: Widening US 10Y/2Y Treasury Yield Spread

Should Be a Tailwind for Financials

The US 10Y/2Y Treasury Constant Maturity yield spread has

been widening over the past several months and recently

reached its highest level since early 2018 amid improving US

economic growth prospects and vaccine optimism.

Financials are likely to be one of the largest beneficiaries if

yield curve steepening persists, the economic recovery

matures and broadens, and more value-based investment

strategies increase their duration of outperformance. This is

especially magnified given the significant underperformance

of the sector relative to the overall market for the past few

years.

Exhibit 17: FINS Relative Y/Y Price Chg at Negative Extremes

Relative Y/Y Price %Chg +/-1std

1991

1993

Relative Y/Y Price %Chg: Financials vs. S&P 500

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

-50%

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019


Performance: Multi-Year Downtrend in Relative Y/Y

Performance Could Be on Verge of Reversing

Financials relative y/y price performance versus the S&P 500

has been in a sharp downtrend since early 2017 with

underperformance levels currently the most severe since the

Great Financial Crisis.

With relative y/y performance for the sector sitting at one

standard deviation below the mean throughout 2020, we

believe a sharp performance reversal may be on the horizon

if history is a guide, especially given the aforementioned

broader market trends.

Exhibit 18: Rising High Quality Count and Falling Low Quality Count Represents a Positive Trend Within Financials

Percentage of Financials With High Quality and Low Quality S&P Stock Rankings

high quality: S&P stock rank of A+, A, A-; low quality: B, B-, C; monthly data

High Quality % Low Quality % 70%

Low Quality %: Avg 60%

High Quality %: Avg

50%

40%

30%

20%

10%

0%

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019


Fundamentals: Nearly Half of Sector Is Composed of High-

Quality Stocks

Over the past five years, there has been a significant shift in

the quality tilt of Financials, with S&P stock rankings of A+, A,

or A- currently comprising nearly 50% of the sector (vs. ~13%

in 2015) and stock rankings of B, B-, or C making up just 14%

(vs. ~55% in 2015).

This transition toward high quality within Financials, in our

view, has been a testament to the fundamental

improvement in the group from a leverage, cash flow, and

dividend growth perspective.


%

Overweight: Industrials (Upgrading to Overweight From Underweight)

Exhibit 19: ISM & LEI Have Troughed With INDU Y/Y Price Chg

Y/Y %Chg in Industrials Relative Price and ISM Manufacturing and US Leading Indicators Index

vs. S&P 500; monthly data 25% 30%

20%15%

10% 5%

0%

-5% -10%

-15% -20%

-25% -30%

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Relative Y/Y Price %Chg (lhs) +/-1std ISM Man Y/Y %Chg US LEI Y/Y %chg

Source: BMO Capital Markets Investment Strategy Group, FactSet, ISM, Conference Board.

Performance: Rebound in Relative Performance Likely to

Persist Amid Economic Recovery and Cyclical Rotation

We mistakenly downgraded Industrials earlier in the year

given the overwhelming uncertainty surrounding a return to

normal economic activity, coupled with the predominant

fundamental strength within the “stay-at-home” phenomenon. While the cyclical ‘’green light” in terms of both the stock market and economic recoveries remains

early, we believe Industrials will be a primary beneficiary of a

broader cyclical recovery.

As such, we are upgrading Industrials to Overweight from

Underweight and believe the continued improvement in

macro conditions, (e.g., including, but not limited to the y/y

%change in US LEI and ISM Manufacturing indices following

their April troughs) could provide significant tailwinds for the

sector’s relative performance for several more months. Potential infrastructure stimulus and a new capex cycle are

also themes to watch in 2021 that could benefit the sector.

Exhibit 20: Strong Cash Flow Generation for Machinery and Road & Rails Helped Offset Declines Across Other INDU Groups

$50

$45

$40

$35

$30

$25

$20

Operating Cash Flow per Share: Select Industrials Industries

2020

$160

$140

$120

$100

$80

$60

$40

$20

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Industrials (lhs) Machinery (rhs) Road & Rail (rhs)


Fundamentals: Operating Cash Flow May Have Bottomed

as Machinery and Road & Rail CF Continue to Rise

LTM operating cash flow per share for Industrials took a hit

during the pandemic, falling roughly 15%, but appears to

have bottomed recently and is showing signs of recovering.

Two of the sector’s largest industries - Machinery and Road &

Rail - have exhibited fairly strong cash flow generation

despite the hurdles faced this year and have helped to offset

declines seen elsewhere in the sector such as Aerospace &

Defense and Airlines. The potential for stronger-than-

expected global economic growth could further increase the

pace of cash flow growth for these industries and thereby

further tailwinds for Industrials overall.

Exhibit 21: S&P 500 Industrials: Industry Snapshot

2/19 -

3/23

since

3/23 NTM PE

2021

EPS

Growth

3M

%Chg in

2021 EPS

Aero & Def -49.3% 52.6% 21.9 43.2% -10.1%

Air Freigh & Log -19.9% 95.7% 19.7 15.3% 17.7%

Airlines -57.3% 51.9% -- -- -185.6

Building Prod -39.8% 104.0% 21.5 11.6% 7.9%

Comm Svc & Suppl -36.4% 67.2% 33.5 11.6% 7.1%

Construct & Eng -38.4% 100.4% 17.3 14.2% 1.4%

Elec Equip -44.1% 102.7% 24.6 9.8% 3.3%

Indu Conglom -40.3% 66.5% 25.2 34.8% 3.5%

Machinery -39.8% 100.1% 23.4 20.3% 5.5%

Prof Svcs -37.7% 76.6% 27.2 9.6% 2.3%

Road & Rail -38.7% 86.0% 23.2 19.7% 3.2%

Trading Cos & Distr -34.7% 101.2% 21.3 6.1% -1.2%

Industrials -41.8% 78.6% 26.7 75.9% -2.6%

S&P 500 -33.9% 59.5% 22.4 21.9% 2.2%


Perspective: Given Diverse Makeup, It is Important to

Remain Active When Searching for Opportunities

Within Industrials, Aerospace & Defense and Airlines have

clearly been the largest laggards both during the Feb-Mar

selloff and the subsequent recovery off the 3/23 lows.

However, all other industries have outpaced the S&P 500

since the March low with Building Products, Construction &

Engineering, Electrical Equipment, Machinery, and Trading Cos

& Distributors all posting outsized gains.

From a growth and revisions perspective, Machinery looks

well-positioned with 2021 EPS growth expected to be ~21%

and bottom-up EPS revised ~6% higher over the past three

months. Industries such as Building Products and Construction

& Engineering currently offer decent value propositions with

below-market NTM P/E ratios, forecasts of double-digit EPS

growth in 2021, and positive revisions momentum.


Market Weight: Communication Services (Downgrading to Market Weight From Overweight)

Exhibit 22: Top Five Stocks in COMSV Comprise 67% of Sector

Weight of Top 5 Stocks in Sector: S&P 500 Sectors

80% 67.7%

70% 63.9% 63.9%

55.9% 55.8%60% 48.4%

45.4% 44.2%50% 39.4%

40% 32.1%

30% 23.1%

20%

10%

0%

UTI

L

COM

SV

CON

D

CON

S

ENRG

FIN

S

HLT

H

IND

U

TECH

MA

TR

REA

L


Perspective: Communication Services Is the Most Heavily

Concentrated S&P 500 Sector

Market cap is heavily concentrated within Communication

Services with the top five stocks - Facebook, Alphabet (Class

A & C), Verizon, and Disney - constituting ~68% of the sector,

more than any other S&P 500 sector. This makes the group

particularly vulnerable to sharp moves in and out of the

“stay-at-home” trade as investors and the market alike

grapple with the tug-of-war between secular growth and

value and/or cyclical strategies.

As such, we believe it is prudent to neutralize the sector at

current levels, thereby downgrading to a Market Weight

stance from Overweight. While we remain very bullish on the

sector longer term, we are advising clients to maintain

positions at current levels, while opportunistically adding on

weakness and trimming on sharp performance spikes – especially those surrounding the stay-at-home trade.

Exhibit 23: Investors May Be Too Optimistic on Comm Svcs

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0

-$500

S&P 500 Communication Services SPDR ETF (XLC) Cumulative YTD Net Fund Flows

$millions

12/

19

11/

20

01/

20

02/

20

03/

20

04/

20

05/

20

06/

20

07/

20

08/

20

09/

20

10/

20

Source: BMO Capital Markets Investment Strategy Group, FactSet, SPDR.

Performance: SPDR ETF (XLC) Has Exhibited Notable Fund

Inflows YTD Especially in Recent Weeks

The S&P 500 Communication Services SPDR ETF (XLC) has

seen $2.8 billion worth of net fund inflows so far this year,

one of the highest amounts among sector SPDR ETFS.

Net fund flows for Communication Services had held pretty

steady from June through October, but in November, roughly

$600 million of inflows have come into the sector SDPR ETF,

which could be a sign that the trade is becoming a bit

overcrowded, in our view.

Exhibit 24: Telecoms and Media Can Offer Yield and Value, WhileEntertainment and Interactive Media Provides Growth

S&P 500 Communication Services: Industry Snapshot excludes Wireless Telecoms which has only one constituent

Communication Services Industry

YTD %Chg

Div Yield NTM PE

EPS LTG

Div Telecom Services -15.2% 5.5% 10.4 2.9%

Entertainment 17.8% 0.3% 46.1 23.2%

Interactive Media & Services

32.7% 0.0% 28.9 18.1%

Media 6.8% 1.3% 17.4 22.0%

Comm Services Sector 16.5% 1.0% 23.3 17.0%


Fundamentals: Excellent Growth/Value Barbell, but Being

Selective Is Key

Despite our more tempered tone toward Communication

Services in 2021, we still believe the sector does have

attractive growth and value opportunities to offer.

Diversified Telecoms and Media primarily equate to the value

portion, with NTM P/E ratios well-below that of the broader

sector and dividend yields of 5.5% and 1.3%, respectively.

Entertainment stocks, such as NFLX, DIS, and ATVI, offer the

highest long-term EPS growth at more than 23%. Interactive

Media & Services, which consists of FB, GOOGL, and TWTR,

have gained a whopping ~33% this year, pushing the

industry’s NTM P/E multiple to five turns above the overall

sector despite only slightly higher EPS LTG.


Market Weight: Consumer Staples

Exhibit 25: Consumer Staples Tends to Be a Laggard When US Economic Indicators Improve

12%

8%

4%

0%

-4%

-8% Rising Y/Y US LEI Falling Y/Y US LEI

10.0% 8.3%

-3.5%

Consumer Staples and S&P 500 Average Y/Y Price Performance During Rising/Falling Y/Y

%Chg in US Leading Indicators Index monthly data since 1990

Consumer Staples S&P 50016% 13.5%

Source: BMO Capital Markets Investment Strategy Group, FactSet, Conference Board

Performance: Improving Macro Data Usually Portends to

Below Market Returns

Our work shows that a strong negative correlation (-0.58)

exists between Consumer Staples relative y/y price

performance and y/y %change in the Conference Board US

Leading Indicators Index. Given that LEI troughed on a y/y

%change basis back in April and has been improving each

month since, sector relative performance is likely to suffer.

In fact, during rising y/y LEI periods since 1990, Consumer

Staples logged an average y/y gain of 10% compared to the

13.5% gain posted by the S&P 500. As such, if economic data

continues to improve and the US LEI returns to growth in the

coming months, the defensive-oriented Consumer Staples

stocks are unlikely to match some of the outsized gains seen

during the heights of the pandemic.

Exhibit 26: Blended Earnings for Consumer Staples Industries Likely to Return to Below-Market Growth

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

10%

5%

0%

-5%

-10%

-15%

-20%

CONS Food & Staples Retail

Beverages Household Prod

Blended Relative EPS Growth: Select Consumer Staples Industries

vs. S&P 500; three largest CONS industries 15%


Fundamentals: Earnings Growth Was a Standout During

Height of Pandemic, but Has Started to Fade

Consumer Staples was one of the standouts during the

pandemic in terms of earnings growth as shoppers stocked

up on food, cleaning supplies, and household products.

However, as the market shifted from chaos to coexistence as

it related to coping with the virus, and economic prospects

improved, blended EPS growth for Consumer Staples and its

largest industries have been coming down to more

normalized levels, more in line with the broader market.

Going forward, we see sector earnings growth resuming its

traditional below-market clip, albeit at a stable and

consistent pace once rates normalize.

Exhibit 27: CONS NTM P/E Dispersion Still at All-Time Highs

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Consumer Staples NTM P/E Dispersion based on coefficient of variation

0.50

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05 Consumer Staples (lhs) vs. S&P 500 (rhs)

0.00

1.00

0.90

0.80

0.70

0.60

0.50

0.40

0.30

0.20

0.10

0.00


Perspective: Record High Valuation Dispersion Highlights

Importance of Stock Selection

A key trend within Consumer Staples that has been in place

even prior to COVID-19 has been rising valuation dispersion,

with the pandemic only exacerbating this tendency.

NTM P/E dispersion among Consumer Staples stocks remains

at all-time highs on both an absolute basis and relative to the

S&P 500, indicating to us that companies in the sector are

operating at varying degrees of fundamental rates, making

stock selection increasingly important. From our lens, the

COVID-19 winners in the group may not be the same stocks

best positioned for longer-term success making it critical to

analyze the sustainability of these companies’ EPS growth.


Market Weight: Health Care

Exhibit 28: Valuations for Health Care Look Appealing

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014 -2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0 Health Care vs. S&P 500

Health Care Valuation Composite average z-score of P/E, NTM P/E, P/B, P/S, and

inverted DY

2016

2018

2020

BMO Capital Markets Investment Strategy Group, FactSet, IBES

Fundamentals: Valuations Sit Well Below Historical

Averages

Valuations continue to look attractive with our absolute

valuation composite currently at a discount to its historical

average since 1990.

With the sector trailing the overall market in six of the last

seven months, relative multiples have collapsed leaving our

valuation composite versus the S&P 500 index near all-time

lows.

Valuations for Health Care appear even more attractive when

considering the sector’s blended earnings growth, which is highest among S&P 500 sectors and is currently eclipsing the

broader market by nine percentage points (US Chartbook).

Exhibit 29: 38% of HLTH Comprises Low-Quality Ranked Stocks

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Percentage of Health Care With High Quality and Low Quality S&P Stock Rankings

high quality: S&P stock rank of A+, A, A-; low quality: B, B-, C; monthly data

40%

35%

30%

25%

20%

15%

10%

5%

0%

High Quality % Low Quality %

High Quality %: Avg Low Quality %: Avg

Source: BMO Capital Markets Investment Strategy Group, S&P, FactSet.

Perspective: Percentage of Low-Quality Stocks Has

Increased, While High-Quality Percentage Has Dropped

Since the end of 2017, the percentage of Health Care stocks

with low-quality S&P stock rankings has substantially

increased, while the percentage of stocks with high quality

rankings has slightly dropped – not an attractive trend for the

sector.

High-quality stocks currently make up just 19% of the S&P

500 Health Care sector, below the 10-year average of 22%.

Meanwhile, low quality stocks represent 38% of the group,

compared to its 10-year average of 29%.

Exhibit 30: Dividend Attributes of Pharmaceuticals and GARP Characteristics of Biotechnology Being Underappreciated

S&P 500 Health Care: Industry Snapshot Excludes Health Care Technology which has only one constituent

Health Care Industry YTD

%Chg Blended

P/E

Blended EPS

Growth Div

Yield

Biotechnology 1.8% 15.1 11.7% 2.6%

HC Equip & Supplies 12.1% 36.2 10.5% 0.7%

HC Prov & Svcs 9.4% 14.9 9.3% 1.1%

Life Scie Tool & Svcs 24.3% 39.4 19.3% 0.2%

Pharma -0.6% 17.5 7.6% 2.7%

Health Care Sector 6.9% 20.2 9.8% 1.6%


Performance: Mixed Trends Evident Within the Sector

Performance within Health Care has been fairly dispersed in

2020 with Life Sciences, Tools & Services the standout

performers in the sector and Biotech and Pharmaceuticals the

notable laggards.

While Life Sciences, Tools & Services clearly has the highest

blended EPS growth rate among Health Care industries, we

believe the GARP attributes of Biotech might be

underappreciated given the group’s below-sector blended

P/E and above-sector growth.

In addition, yield-seeking Health Care investors could look to

the Pharmaceuticals industry, which offers a ~100 bps

dividend yield advantage compared to the overall sector.



Market Weight: Information Technology (Downgrading to Market Weight From Overweight)

Exhibit 31: Weight of Technology in the S&P 500 Has Been Increasing Post-GICS Reclassification

Technology Sector Weight Average

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Technology Sector Weight % in S&P 500

35% GICS reclassification

30%

25%

20%

15%

10%

5%

0%


Perspective: Technology Now Represents More Than 27%

of S&P 500 Index

The GICS reclassification in September 2018 decreased the

weight of Technology in the S&P 500 from 26% down to

21%. Since then, however, the sector’s weight has slowly increased with the sector now comprising more than 27% of

the index, not far off the post-2000 highs.

Similar to Communication Services, we remain firmly bullish

on Technology over the longer term and urge investors not to

sell, but rather, maintain positions. However, we believe the

already large weight of tech stocks makes it difficult to

continue to recommend an overweight position from a

portfolio construction standpoint over the next 6-12 months

especially given the sector’s extended valuations and price

appreciation over the past few years.

Exhibit 32: Price Run-Up in Tech Has Become Extended

Relative Y/Y Price %Chg +/-1std

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

Relative Y/Y Price %Chg: Technology vs. S&P 500

60%

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%


Performance: Relative Y/Y Price Performance Has

Recently Climbed to Extreme Levels

While relative y/y price performance for Technology versus

the S&P 500 has been increasing for more than a year, it has

recently climbed to extreme levels (one standard deviation

above mean) that have typically been followed by a reversal.

This relative price strength has also helped push absolute and

relative valuations to well-above historical norms (US

Chartbook), thereby increasing the risk that the sector is

increasingly priced for perfection, in our view.

As such, the extremes in relative y/y price performance and

extended valuations are two primary reasons we chose to

downgrade Technology to Market Weight from Overweight.

Exhibit 33: Tech Industries are Expected to Grow Dividends at a Solid Clip Over the Next 12 Months

Tech

nolo

gy

IT S

erv

ices

Soft

ware

Com

ms

Equip

Tech

Har

dw

are

&

Stora

ge

Elec

Equip

Inst

r &

Co

mp Se

mis

S&P 5

00

5.8% 4.6%

8.3%

3.8% 4.0%

7.6%

6.5%

2.7%

0%

2%

4%

6%

8%

10%

NTM Dividend Growth: Technology Industries

20%

0%

40%

60%

100%

80%

NTM Dividend Growth (lhs) % of Group Paying Dividends (rhs)


Fundamentals: Dividend Growth – The Forgotten

Opportunity

Many clients that we interact with do not think of Technology

when it comes to dividend growth. With that said, however,

more than 60% of the sector pays a dividend and analysts

are forecasting that the sector will grow dividends at a 5.8%

clip over the next 12 months, compared to just 2.7% for the

S&P 500 index.

In fact, dividend payers exist in every Technology industry.

For instance, in the two largest industries by number of

constituents - Semis and IT Services - 76% and 65% pay

dividends respectively, and they are expected to grow their

dividends 6.5% and 4.6%, respectively, in the next 12

months.




Market Weight: Materials

Exhibit 34: Rising Commodity Prices and a Declining US Dollar Seem to Be Key Tailwinds for Materials Relative Performance

CRB Commodity Spot Index MATRS vs. S&P 500

US Dollar Index (rhs, inverted)

30%

20%

10%

0%

-10%

-20%

-30%

2010

Y/Y %Chg in CRB Commodity Spot Index vs. Materials Relative Y/Y Price %Chg vs. Y/Y %Chg in USD Index

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

-15%

-10%

-5%

0%

5%

10%

15%

Source: BMO Capital Markets Investment Strategy Group, FactSet, Haver.

Performance: Relative Performance and Y/Y %Change in

CRB Commodity Index Have Been Highly Correlated

Materials has been one of the best performing sectors

recently, up ~11% in the past three months and outpacing

the S&P 500 by 11 percentage points since the end of April.

Improving economic data has helped lift commodity prices

(CRB Commodity Spot index), which historically has exhibited

a strong correlation with Materials relative y/y performance.

Additionally, the US dollar index has fallen ~7% since April,

another development that has likely benefitted the sector

given their inverse relationship historically.

Despite the rally in Materials, we remain comfortable with

our Market Weight rating given the sector’s largely neutral fundamentals. We also believe this price strength makes

Materials particularly vulnerable to profit taking among

investors if COVID-19 or US economic activity trends worsen.

Exhibit 35: Enduring Tailwinds for Chemicals Likely Needed for US Materials to Outperform

S&P 500 and S&P/TSX Composite Materials: Industry Snapshot (in USD)

Materials Industry Materials Weight

MTD %Chg

YTD %Chg

since 3/23

S&P 500 9.1% 10.4% 59.5%

Materials 10.0% 13.1% 80.6%

Chemicals 68.7% 11.2% 10.2% 78.5%

Construction Materials 4.9% -1.0% -2.9% 78.6%

Containers & Packaging 13.9% 11.6% 18.5% 83.5%

Metals & Mining 12.4% 6.0% 34.9% 91.3%

S&P/TSX Composite 11.0% -1.4% 67.9%

Materials 0.5% 19.2% 74.9%

Chemicals 9.9% 9.3% -9.2% 80.0%

Containers & Packaging 3.6% 17.8% 7.2% 81.8%

Metals & Mining 83.5% -1.5% 25.2% 71.4%

Paper & Forest Products 3.1% 10.1% 23.2% 194.3%


Perspective: Makeup of Materials Sector in US vs. Canada

Is Vastly Different

In the US and Canada, Metals & Mining has been the best

performing industry within Materials. However, their impact

on the overall sector in each region is very different, with

Metals & Mining consisting of only three stocks in the S&P

500 and comprising ~12% of the Materials sector compared

to 41 Metals & Mining stocks in the TSX representing ~84% of

Materials.

In the US, Chemicals constitute the biggest portion of

Materials at ~69%. And in order for the broader sector to

consistently outperform in 2021, global growth will likely

need to provide a lasting longer-term tailwind for

commodities and chemical demand, something we are not

fully convinced of just yet.

Exhibit 36: Earnings Growth for Materials Continues to Recover

Materials Blended EPS Growth avg. of LTM & NTM; compared to S&P 500

Blended Growth vs. S&P 500

40%

30%

20%

10%

0%

-10%

-20%

-30%

50%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020


Fundamentals: Earnings Growth Has Been Improving, but

Remains Only Slightly Higher Than SPX Growth Rate

Blended EPS growth for Materials had been on the decline for

the better part of 18 months before troughing back in April

with growth now improving for six straight months.

In the context of the broader market, the sector’s blended EPS growth has been recovering at a slightly faster pace

relative to the S&P 500 (3.8% vs. 1.3%) which is not

necessarily surprising given the sharp drop in earnings earlier

in the year.

A V-shaped recovery in NTM earnings growth expectations for

the Chemicals industry was one of the main drivers of the

recovery in Materials blended EPS growth and will likely need

actual earnings growth to at least meet expectations for this

trend to continue (US Comment).


https://researchglobal0.bmocapitalmarkets.com/research/3e4faf20-affe-4c46-83a1-c0de34ba78db/

Underweight: Energy

Exhibit 37: Crude Oil Prices Not Projected to Move Meaningfully Higher in 2021 According to Forecasts

12/

17

02/

18

04/

18

06/

18

08/

18

10/

18

12/

18

02/

19

04/

19

06/

19

08/

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10/

19

12/

19

02/

20

04/

20

06/

20

08/

20

10/

20

12/

20

$10 100 2020E 2021E Crude Oil

2022E Energy (rhs) $0 0

Crude Oil, WTI Spot Price and Current Consensus Forecasts vs. S&P 500 Energy Price

$80 700

$70 600

$60 500

$50 400

$40 300

$30

200$20


Performance: With Consensus Forecasts for Crude Oil Not

Suggesting Any Notable Breakout Higher, Energy Stocks

Will Likely Continue to Struggle

Our work shows that the y/y price change in crude oil and

Energy stocks have been tightly correlated historically and

therefore, the direction of oil prices will very likely dictate the

performance of Energy in the coming months (US Comment).

While crude oil has rebounded sharply from its April low,

prices remain significantly below the levels seen at the start

of the year. With the 2021 consensus target price forecast for

oil implying limited upside, it will likely be difficult for Energy

to keep pace with the broader market, especially given the

secular supply and demand issues intact.

Exhibit 38: 2021 World Oil Consumption Estimated to Trail 2018 and 2019 Levels

Total World Oil Consumption millions of barrels per day; gray bars are OPEC forecasts

100

90

80

70

60

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Source: BMO Capital Markets Investment Strategy Group, FactSet, OPEC.

Exhibit 39: Energy Sector Weight in S&P 500 at a Record Low

Perspective: World Oil Consumption Expected to Be Fairly

Subdued in 2021

From a demand perspective, world oil consumption is

expected to fall to ~90 million barrels per day by the end of

2020, a significant drop from the ~99.8 million barrels in

2019.

And while forecasts from OPEC suggest a demand rebound in

world oil consumption in 2021 to ~96.3 million barrels per

day, this level would still be below those of 2018 and 2019.

It is also important to note that these current 2020 and 2021

OPEC forecasts represent downward revisions from the OPEC

annual estimates made back in October.

Therefore, subdued demand is another potential headwind

for Energy performance in the months ahead.

Energy Sector Weight in S&P 500 Index

18%

16%

14%

12%

10%

8%

6%

4%

Current Weight: 2.0% 2%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

0%

S&P 500 Energy Weight Average


Perspective: Energy Represents the Smallest Sector

Weight in S&P 500 and at Risk of Becoming Too Small to

Even Matter

The weight of Energy stocks in the S&P 500 has been in

freefall for more than 12 years and represents just 2.0% of

the index as of the end of October, the smallest weighting for

the group on record.

With Energy now the smallest sector in the S&P 500 index

(MATR: 2.7%, REAL: 2.6%, UTIL: 3.2%), the group may be at

risk of becoming too small to even matter if this downward

trend persists.


https://researchglobal0.bmocapitalmarkets.com/research/42e448dc-3959-4e0c-84ba-08a237a72552/

Underweight: Real Estate (Downgrading to Underweight From Market Weight)

Exhibit 40: Real Estate Has Struggled When Yields Tick Higher

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

-200

-150

-100

-50

0

50

100

150

200

Real Estate Rel Y/Y %Chg vs. S&P 500 (rhs)

Y-Y diff in 10Y Yield (lhs, inverted scale)

Real Estate Relative Y/Y %Chg and Y-Y Difference in US 10Y Treasury Yield

monthly data since 2001; vs. S&P 500 40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

-50%


Performance: Rising US 10Y Treasury Yields Likely to Be a

Headwind for Relative Performance

US 10Y Treasury yields have been on the rise since early

August and recently reached their highest levels since March.

If this trend continues, which we see as a very likely

possibility as US economic activity improves and daily life

slowly returns to a state of normalcy, Real Estate stocks will

likely struggle relative to the S&P 500 if past is prologue.

While Real Estate performance may fare better in the coming

months compared with a true yield-proxy like Utilities given

its slightly more cyclical tilt (hotel, office, retail REITs), we still

believe the sector will ultimately fail to keep pace with the

overall market in 2021 which is a primary reason why we

have downgraded Real Estate to Underweight from Market

Weight..

Exhibit 41: Real Estate Dividends Have Been Negatively Affected by the Pandemic

Real Estate S&P 500

2015

2016

2017

2018

2019

2020

Trailing 12-Month Y/Y Dividend Growth: Real Estate and S&P 500

25%

20%

15%

10%

5%

0%


Fundamentals: Dividend Growth Has Notably Decelerated

in Recent Months and Now Trails the Overall Market

The pace of dividend growth for the Real Estate sector has

notably slowed to 3.7%, from a 9% clip earlier in the year

with the impact from the pandemic leading to five dividend

cuts and three dividend suspensions among REITs within the

S&P 500 over the past several months.

Trailing 12-month dividend growth for Real Estate now trails

that of the overall market. Given the importance of DPS

growth for the sector, a continuation of this recent trend

could limit relative price upside moving forward as investors

look to other areas of the market for income growth and

yield.

Exhibit 42: Real Estate Blended FFO Now Pointing to a Decline

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%

Blended FFO Growth: Real Estate avg. of LTM and NTM; vs. S&P 500

Real Estate Blended Growth vs. S&P 500

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020


Fundamentals: Blended FFO Growth Has Turned Negative,

Establishing a Downtrend Relative to the S&P 500

Blended FFO growth for Real Estate fell into the red in August

for the first time in more than 10 years.

Relative to the S&P 500, the sector’s blended FFO growth had

been in a solid uptrend during the 18-month period through

the first quarter of this year, but has been on the decline

since then, and now firmly trails the blended EPS growth rate

for the broader market.


Underweight: Utilities (Downgrading to Underweight From Market Weight)

Exhibit 43: Historically, a Rising Y/Y US 10Y Treasury Yield Environment Has Been an Impediment to Utilities Performance

-200

-300

Y-Y diff in 10Y Yield (lhs, inverted scale)

Utilities Rel Y/Y %Chg vs. S&P 500 (rhs)

60%

Utilities Relative Y/Y %Chg and Y-Y Difference in US 10Y Treasury Yield

monthly data ; vs. S&P 500 correlation:

10Y: -0.58

80% since 1990: -0.40

-100

0

100

200

300

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

40%

20%

0%

-20%

-40%


Performance: Inverse Correlation Between Treasury Yields

Utilities Relative Performance Does Not Bode Well

Akin to Real Estate, Utilities relative performance is likely to

be significantly hindered in a rising US 10Y Treasury yield

environment. The more defensive nature of Utilities (vs. Real

Estate) could also hurt performance if economic activity

recovers at a faster-than-expected pace especially given the

strong inverse correlation of -0.58 between Utilities relative

y/y performance vs. the S&P 500 and the y/y difference in

the US 10Y Treasury yield over the past 10 years.

With all that said, spikes in volatility could lead to short-term

moves into Utilities stocks, and an accelerated shift toward

clean energy may also provide a temporary boost to select

Electric Utilities names. But ultimately, we believe the yield

backdrop and subpar fundamentals will make the sector an

underperformer for most of 2021.

Exhibit 44: Cash Flow for Utilities Has Declined, While Leverage Continues to Rise

Cash Flow per share (lhs) Debt to Equity (rhs)

$36

$34

$32

$30

$28

$26

2010

Utilities Cash Flow per Share and Debt to Equity

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

1.40

1.35

1.30

1.25

1.20

1.15

1.10

1.05

1.00


Fundamentals: Declining Cash Flow + Rising Leverage

Could Pose a Problem, Especially if Yields Continue to Rise

Cash flow per share moved sideways from 2016 to 2018, but

has notably declined over the past 18 months before slowly

leveling out. Regardless, overall cash flow per share is still

near its lowest readings since 2012.

In addition, sector leverage has continued to rise with the

aggregate debt to equity ratio standing at 1.3x. The

combination of declining cash flow and increasing leverage in

Utilities could present issues especially if yields continue to

tick higher. Dividends could also suffer as some companies

may be unable to maintain or grow their payouts.

Exhibit 45: Dividend Yield Advantage for Utilities Has Waned

Utilities Relative Dividend Yield Spreads

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

vs. REITs vs. Consumer Staples vs. S&P 500

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020


Perspective: Dividend Yield Spreads Versus the Market

and Other Defensive Sectors Have Waned

High dividend yields have historically been one of the most

attractive attributes for Utilities. However, the yield

advantages relative to the market and other defensive

sectors like REITs and Consumer Staples have waned in recent

years.

Looking back 10 years ago during the early stages of the prior

bull market, Utilities had a dividend yield spread that was

~150 bps higher than both REITs and Consumer Staples and

250 bps higher than the S&P 500. That advantage for the

sector has narrowed over the years with the current spread

over Consumer Staples and the S&P 500 just ~50 bps and 150

bps, respectively, with the dividend yield for REITs essentially

in line with that of Utilities.


US Size and Style

Exhibit 46: US Size and Style Opinions Sector Opinion Comments

Large cap (LC) MW Longer-term stability; valuation premium historically, not to mention relative to MC + SC, is likely to proceed

Mid cap (MC) MW Majority of fundamental and performance metrics largely in-line with SC, albeit FCF recovering even stronger than LC

Small cap (SC) MW SC earnings expectations lead the pack for now, but so too, do their debt levels; valuations largely on par with MC

Value MW Multi-year bottom relative to growth and overall market (finally) remains preliminary as knee-jerk investing habits persist

Growth MW Growth becoming less scarce and more abundant; accumulate secular growth on weakness and trim on strength

Source: BMO Capital Markets Investment Strategy Group.

Key: OW: Overweight, MW: Market Weight, UW: Underweight

Own BOTH Value and Growth

While the value and more traditional cyclical parts of the stock market are beginning to show signs of

life with broader value indices potentially drawing out a significant bottom relative to growth, we

believe it is too soon to anoint an all value trade at current levels.

Instead, investors should employ active stock picking strategies and take advantage of the

heavily ladened momentum market that we believe will continue in 2021. Namely, add to

positions on weakness and trim on strength.

To be sure, increased realities of vaccines and therapeutics to combat the pandemic will fuel

prospects for a broader economic reality, leading to a massive move in value disciplines in our

view. However, momentum works in both directions, with fears of further lockdowns favoring

the stay-at-home and growth stocks. As such, investors should trade accordingly and maintain

diversified positions in both value and growth.

Diversify Across Market Caps

Strong cash flow and consistent earnings and dividend growth within large cap stocks should

be used to balance binary moves in small- and mid-cap stocks during periods of back-and-forth

momentum.

While larger companies clearly outpaced their smaller cap brethren in terms of valuation and

performance in 2020, earnings growth trends and forecasts are closer to par relative to

historical trends.

Please see October 22, 2020 Comment for more details.

Exhibit 47: Value Stocks on Track for Biggest Underperformance vs. Growth for a Calendar Year Despite November Surge

Exhibit 48: Absolute Valuations Currently Well-Above Historical Norms Across Market Caps, but Less so for S&P 600 and S&P 400

Value vs. Growth Annual Relative Price Peformance based on Russell 1000 Value and Growth; YTD

performance for 2020

-40%

-30%

-20%

-10%

0%

10%

20%

30%

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019


Valuation Composite: Small Caps, Mid Caps, and Large Caps

average z-score of LTM P/E, NTM P/E, P/B, and P/S

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0 S&P 600 S&P 400 S&P 500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020



https://researchglobal0.bmocapitalmarkets.com/research/4584134e-3fb9-4c0b-9c8c-3aabe1fbe7b2/

Value, Growth and Size Dynamics

Exhibit 49: Earnings Growth Expectations for Value Stocks Have Picked Up, Recently Eclipsing Those of Growth Stocks

Value Value minus Growth

1996

1997

1998

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2000

2001

2002

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2004

2005

2006

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2014

2015

2016

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2018

2019

2020

40%

35%

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

Value vs. Growth: NTM EPS Growth based on S&P 500 Value and Growth


Exhibit 50: Value Relative Price vs. Growth Still Sitting Near All-Time Low Levels

1.60

1.40

1.20

1.00

0.80

0.60

0.40

0.20

Value vs Growth +/- 1 std

1978

1980

1982

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2000

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2004

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2008

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2012

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2016

2018

Value vs. Growth Relative Price Performance based on Russell 1000 Value and Growth

2020


Exhibit 51: Value Tends to Outpace Growth in the Periods Following US Recessions

Russell 1000 Value Relative Performance vs. Russell 1000 Growth Following US Recessions

NBER Recession Troughs

+3M +6M +12M +18M +24M

7/31/1980 -7.8% -4.2% -0.2% -0.6% 0.4%

11/30/1982 0.0% 2.6% 8.4% 14.7% 17.1%

3/31/1991 0.6% -1.5% -4.3% -2.2% 8.0%

11/30/2001 7.4% 15.5% 11.7% 12.8% 12.4%

6/30/2009 4.0% -0.3% 2.5% -2.7% -4.7%

Average 0.8% 2.4% 3.6% 4.4% 6.6%

Source: BMO Capital Markets Investment Strategy Group, FactSet, NBER.

Exhibit 52: Steepening Yield Curve Has Historically Favored Value Relative Performance vs. Growth

150

100

50

0

-50

since 1990: 0.30 10Y: 0.80

300

250

200

US 10Y/2Y Spread (lhs) Relative Price: Value vs. Growth

1990

US 10Y/2Y Treasury Constant Maturity Yield Spread and Russell 1000 Value Relative Price vs. Russell

1000 Growth spread in bps; monthly data

correlation:

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

1.20

1.00

0.80

0.60

0.40

1.40


Exhibit 53: Small Caps Typically Lag When VIX Levels Increase

Average Relative Y/Y Price %Chg Based on Rising/Falling Y/Y VIX: Small and Mid Caps vs. Large

Caps

4.0% monthly data since 1990

3.4% 3.5%

3.0%

2.0%

1.0%

0.0%

-1.0% -0.8%

-2.0%

-3.0% Rising Y/Y VIX Falling Y/Y VIX -2.9%

-4.0% Russell 2000 vs Russell 1000 Russell Mid Cap vs Russell 1000

Source: BMO Capital Markets Investment Strategy Group, FactSet, CBOE.

Exhibit 54: Leverage Remains Elevated for Small- and Mid-Caps

1.50

Net Debt to EBITDA: Small Caps, Mid Caps, and Large Caps

excludes Financials

S&P 600 S&P 400 S&P 500

3.50

3.00

2.50

2.00

4.00

1.00

0.50

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020



2021 Market Outlook - Canada

Still in Undiscovered Value Territory

No doubt, US stock market and economic resilience have been overarching global investing themes over

the past decade and likely to remain the case for the foreseeable future, especially as we transition out

of 2020 and global markets struggle with the believability of the earnings recovery and a return to

normalcy. However, this notion of US resilience and wherewithal has also shown itself within Canadian

equities. In fact, while Canadian equities have generally underperformed the US over the last decade,

Canadian equities have managed to outperform most global markets over the last five years, despite

the S&P/TSX’s large overweight in Energy and Materials (Exhibit 55). Indeed, we believe Canada

remains well positioned to benefit from both a return to stability and the improving North American

economy, given it has one of the strongest cross-border relationships with the US of all global markets.

As such, our overriding theme for Canadian equities remains, “As America Goes, So Goes Canada.”

Furthermore, we believe there remains an attractive value proposition within Canadian equities for

those investors that would like to increase their US growth exposure. Yes - Canada as a value play -

especially when examining non-resource sectors (Exhibit 56). This is particularly true within sectors like

Consumer Discretionary, Industrials and Financials, where companies have relatively high US revenue

exposure and have shown consistency and pliability in the face of difficult operating environments.

Therefore, as investors continue to deal with the unprecedented nature of 2020 and challenges that

remain for 2021, Canada is likely to march toward a new all-time price high according to our models.

Exhibit 55: TSX in Line With World as US Outperforms

Global Equity Market Performance ($USD) (Year-to-date vs 5yr CAGR)

S&P/TSX

S&P 500

MSCI World ex USA

-2.1%

10.4%

-0.1%

8.5%

19.5%

5.4%

-10% 0% 10% 20% 30%

YTD 5yr

Exhibit 56: S&P/TSX Faces Record Valuation Spread

NTM PE Ratio Spread (S&P/TSX ex Resources vs S&P 500)

-7

-6

-5

-4

-3

-2

-1

0

1

2

2007 2009 2011 2013 2015 2017 2019

TSX Ex Resource less SPX NTM PE

Source: BMO Capital Markets Investment Strategy Group, FactSet, MSCI. Source: BMO Capital Markets Investment Strategy Group, FactSet.


S&P/TSX Price Target 19,500; EPS target $1,100

Yes, “As America Goes so Goes Canada” remains our core belief for Canadian equities, with the TSX likely

to post double-digit gains as the North American economy and society slowly transition back to normal.

As such, we forecast that the S&P/TSX will rise +7% (from our 18,200 2020 year-end target) and reach

19,500 by 2021 year end which would mark a new all-time high. Our expectation is based on the

assumptions of a continued low cost-of-equity rate (DDM model) and a higher-than-normal market

multiple (P/E model) – both of which we reconcile with an expectation for interest rates to remain

historically low for the foreseeable future.

On the earnings front, we forecast $1,100 for 2021 S&P/TSX EPS, an over 40% jump from the pandemic-

depressed 2020 level. Our expectation assumes that companies will build on the earnings recovery

displayed in recent quarters, as more areas of the economy adapt and get closer to normal levels of

activity throughout the year. In addition, we also believe current consensus earnings expectations are

too conservative, setting up the potential for significant upward surprise in the coming quarters.

Baseline Canadian Assumptions (in Addition to US Model Assumptions)

Oil price remains range bound, with WTI sub $50/bbl on average

Gold price stabilizes, but remains above $1,800/oz on average

2021 S&P/TSX Targets

Price Target Model Category 2021E

Dividend Discount Model Fundamental 19,675

Fair Value Price-to-Earnings Model Valuation 19,213

Expected Return* 15.5% Latest S&P/TSX Close 16,890 Price Target 19,500

Earnings Per Share Target Model Category 2021E

Macroeconomic Regression Model Macro $993

Bottom Up Mean Consensus Expectation Fundamental $1061

Normalized EPS Mean Reversion $1238

Expected EPS Growth 39.2% Prior Year S&P/TSX EPS** $790 EPS Target $1100

Implied P/E 17.7x

Source: BMO Investment Strategy Group. *Based on 11/18/2020 closing price.**Based on our prior-year EPS target if EPS is not fully reported for index.


Sectors, Size, and Style Recommendations

Canadian Sector Opinions

Exhibit 57: Canadian Sector Opinion Summary

Sector Opinion Index

Weight Target Weight BMO Investment Strategy Group Headline

Communication Services MW 5.2 5.0 Remains our favourite yield play, despite challenges of yield strategies. Given secular dividend growth, recent underperformance provides timely longer-term opportunity

Consumer Discretionary OW 3.8 5.0 Classic Early Cyclical with long outperformance tail suggests persistent outperformance. Consumer Staples MW 4.2 4.0 Expensive sector but earnings growth remains stable. Be increasingly selective. Energy MW 11.3 11.0 Structural challenges persist, but contrarian rebounds are often sharp and difficult to anticipate.

Financials OW 29.8 31 Steadfastly maintaining holdings in the broader sector, however we prefer those companies with strong US platforms – especially within the banks (commercial banking + wealth management).

Health Care MW 1.2 1.5 Significant price correction and regulatory tailwinds within Cannabis suggest neutralized position.

Industrials OW 12.6 13.5 Well-positioned for cyclical recovery. Focus on the rails, select manufacturers and waste companies – especially those leveraged to the US.

Information Technology MW 9 9.5 Prefer the US; very select positions in Canada that are levered to secular trends.

Materials MW 14.5 14.5 A tale of two sectors within the sector = neutralize gold and precious metals on sharp outperformance; while overweight the non-gold Materials sector on cyclical recovery.

Real Estate UW 5.4 3.0 Structural issues to persist in 2021 and yield strategies likely to remain challenged as yield grind higher. Utilities UW 3.3 2.0 Rising yields, low organic growth and high payout ratios are a tough combination.


Key Sector Changes

Communication Services to Market Weight from Overweight

Consumer Discretionary to Overweight from Market Weight

Consumer Staples to Market Weight from Overweight

Industrials to Overweight from Market Weight

Health Care to Market Weight from Underweight

Real Estate to Underweight from Market Weight

Utilities to Underweight from Market Weight

Exhibit 58: S&P/TSX Annual Sector Performance Year COMSV COND CONS ENRS FINL HLTH INDU INFT MATR RELS UTIL S&P/TSX

1990 -12.6% -25.1% -11.4% -10.5% -21.7% -21.3% -24.3% 2.8% 19.3%- -2.4% -18.0% 1991 21.5% 14.0% 21.4% -19.0% 21.1% 61.5% -10.5% 55.9% 3.6% - 1.3% 7.8% 1992 -11.2% -1.2% 0.9% 3.5% -11.9% -14.2% -11.1% 20.0% -1.5% -4.4% -4.6% 1993 16.4% 21.0% 4.0% 33.1% 27.8% 5.6% 27.6% 18.6% 56.8% 19.1% 29.0% 1994 -1.8% -11.6% -1.8% -7.1% -6.1% 13.4% 3.0% -7.2% 4.1% -9.6% -2.5% 1995 2.7% 0.6% 19.4% 15.2% 14.1% 62.3% 13.7% 34.0% 7.6% 6.3% 11.9% 1996 30.9% 25.4% 15.2% 36.8% 49.9% 30.1% 30.4% 21.7% 9.7% 22.4% 25.7% 1997 39.2% 28.4% 16.2% 3.1% 49.8% -11.1% 19.2% 40.1% -26.2% 38.2% 13.0% 1998 21.1% 6.7% 23.6% -30.4% 0.6% -0.3% -11.2% 7.6% -12.3% -4.0% -3.2% 1999 85.0% -0.5% 13.3% 26.2% -13.0% 13.1% 4.1% 188.8% 12.4% -30.6% 29.7% 2000 22.5% 9.5% 38.1% 46.3% 45.6% 3.8% 28.2% -31.1% -8.9% 42.6% 6.2% 2001 -29.6% 1.7% 27.4% 6.1% 1.3% 15.2% 5.5% -62.1% 8.9% 6.4% -13.9% 2002 -21.9% -21.3% 0.9% 12.7% -5.0% -42.8% -31.3% -64.8% 5.5% 2.1% -14.0% 2003 12.6% 19.5% 18.9% 23.6% 24.4% 1.3% 21.1% 67.0% 26.0% 19.9% 24.3% 2004 8.2% 8.3% 9.3% 28.7% 16.5% -17.4% 0.2% 11.5% 5.7% 11.2% 5.0% 12.5% 2005 9.7% 8.6% -2.2% 61.3% 20.5% -3.5% 16.5% -15.8% 13.9% 20.0% 33.1% 21.9% 2006 16.4% 13.2% 3.9% 3.2% 15.9% -0.7% 12.7% 27.3% 38.0% 23.5% 2.1% 14.5% 2007 16.2% 1.8% -6.8% 5.0% -4.6% -27.1% 8.6% 48.1% 29.1% -11.6% 6.9% 7.2% 2008 -27.4% -37.5% -7.8% -36.3% -39.0% -34.4% -26.9% -54.3% -27.1% -45.2% -24.0% -35.0% 2009 0.7% 11.1% 6.1% 35.0% 38.3% 28.6% 23.7% 44.3% 33.4% 35.0% 12.7% 30.7% 2010 16.2% 21.8% 8.3% 10.0% 6.3% 50.3% 14.4% -11.6% 35.8% 26.4% 12.6% 14.4% 2011 19.0% -17.9% 4.8% -12.3% -6.6% 49.6% 2.0% -52.6% 21.8%- 1.1% 1.6% -11.1% 2012 6.4% 8.7% 1 20.4% -3.6% 12.8% 24.1% 12.7% -3.2% -6.9% 16.2% -0.8% 4.0% 2013 8.1% 9.5% 3 21.4% 9.9% 19.1% 71.7% 34.9% 36.2% 30.6%- 0.5% -8.6% 9.6% 2014 10.5% 6.4% 2 46.9% -7.8% 9.8% 30.2% 20.0% 34.0% -4.5% 18.0% 11.3% 7.4% 2015 -1.0% -3.5% 11.0% -25.7% -5.5% -15.8% -12.5% 14.8% 22.8%- 3.1% -7.8% -11.1% 2016 9.9% 8.2% 6.1% 31.2% 19.3% -78.6% 20.7% 4.4% 39.0% 4.1% 12.7% 17.5% 2017 9.9% 0.4% 2 6.4% -10.0% 9.4% 32.7% 17.9% 16.2% 6.3% 5.8% 6.2% 6.0% 2018 -5.3% -17.7% 0.6% -21.5% -12.6% -16.6% -3.9% 12.5% 10.6%- -2.8% 13.4%- -11.6% 2019 8.2% 3.1% 1 12.8% 16.2% 16.9% -11.4% 23.6% 63.5% 22.1% 17.4% 31.6% 19.1% 2020 -7.3% 7.6% 4.4% -34.1% -5.1% -24.3% 13.8% 57.3% 16.8% -10.1% 8.2% -1.0%

36.6%

Source: BMO Capital Markets Investment Strategy Group. Performance calculated through 11/18/20.

REITs are used as a historical proxy for the Real Estate sector which was officially established in Sept. 2016.


Overweight: Consumer Discretionary (Upgrading to Overweight From Market Weight)

Exhibit 59: Classic Early Cyclical

Consumer Discretionary vs S&P/TSX Relative Year/Year Performance

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

Recessions

1/

56

10/58

7/

61

4/

64

1/

67

10/69

7/

72

4/

75

1/

78

10/80

7/

83

4/

86

1/

89

10/91

7/

94

4/

97

1/

00

10/02

7/

05

4/

08

1/

11

10/13

7/

16

4/

19


Consumer Discretionary = Classic Early Cyclical

Our work shows Consumer Discretionary has almost always

troughed just before or during the beginning stages of

recessions when there are very few compelling economic

arguments to own the sector.

Exhibit 60: Outperformance Can Persist Post Market Troughs

Consumer Discretionary Relative Performance Around Recessionary Market Troughs

(data since 1956)

12m Before

6m After

12m After

Subsequent 2nd year

after trough

Subsequent 3rd year

after trough

Dec-57 3.9% 14.6% 36.3% 18.0% -8.5%

Jul-60 -4.6% -2.7% -0.7% 1.2% 6.5%

Jun-70 -3.2% 2.4% 28.8% 22.3% -0.4%

Sep-74 -4.3% 14.9% 15.3% -8.4% -3.2%

Nov-78 -5.6% 2.4% -22.5% 0.5% 4.4%

Jun-82 14.0% -3.2% 6.1% 8.3% 15.2%

Oct-90 -12.0% 13.5% 11.8% -1.1% -1.0%

Sep-02 -5.1% -8.2% -4.6% -9.0%

Feb-09 5.7% -15.6%

Average -1.2%

-14.9%

6.2%

-4.8%

3.0%

-9.0%

1.8%

0.6%

Current -14.0%

2.0%

21.9%


Consumer Discretionary = Long Outperformance Tail

While the bulk of the outperformance typically occurs in the

first 12 months of recovery, historically Consumer

Discretionary outperformance can persist beyond the first 12

months.

In fact, the Consumer Discretionary sector has one of the

longest outperformance tails of traditional early cyclical

areas, outperforming on average in the first year, the second

year, and even in the third year following recessions.

Exhibit 61: Earnings Poised for Cyclical Recovery

Consumer Discretionary: LTM Earnings Growth versus Non-Energy Export Growth

80%

60%

40%

20%

0%

-20%

-40%

-60%

40%

30%

20%

10%

0%

-10%

-20%

-30%

LTM EPS Growth Non Energy Export Growth

Consumer Discretionary = Earnings Poised to Rebound

Yes, the earnings recession within Consumer Discretionary

has matched the depths seen in previous recessions.

However, like the most previous earnings recession,

rebounding US manufacturing activity is likely to be a strong

tailwind for the sector.

Overall, we believe US revenue exposure is likely to be the

key area of strength through the recovery and believe

investors should be more selective and overweight

companies with relatively high US growth exposure.



Overweight: Industrials (Upgrading to Overweight From Market Weight)

Exhibit 62: Earnings Set for Record Rebound

202

1

201

9

201

7

201

5

201

3

201

1

200

9

200

7

200

5

200

3

200

1

199

9

199

7

199

5

199

3

199

1

LTM EPS Growth ISM

Industrials: LTM EPS Growth vs ISM

50%

30%

10%

-10%

-30%

-50%

65

60

55

50

45

40

35

Source: BMO Capital Markets Investment Strategy Group, FactSet, ISM.

Industrials = Well Positioned for Recovery

Earnings growth clearly felt the brunt of the impact from

shutdowns, but signs of a rebound are materializing. In fact,

the ISM has been consistently above 50, suggesting earnings

have troughed and rebound is likely to continue.

Exhibit 63: Stable Profitability, Strong Cash Generation

2021

2019

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

ROE FCF Yield

Industrials: ROE and Free Cash Flow Yield

25%

20%

15%

10%

5%

0%

-5%

10%

8%

6%

4%

2%

0%

-2%

-4%


Industrials = Stable Profitability and Strong Cash

Generator

Return on equity remains stable and above the long-term

average.

In addition, free cash flow has continued to improve and is

now above the long-term average.

Exhibit 64: Yes, Valuations Are Expensive

2.0 inverted DY

2021

2019

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

Industrials: Valuation Composite average z-score of P/E, NTM P/E, P/B, P/S and

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

Composite vs S&P/TSX


Industrials = Expensive on Depressed Earnings

While Industrials are certainly expensive, we believe these

valuations are likely inflated given the depressed earnings – thereby displaying a “classic cyclical PE.”

As such, given the strong cyclicality of the sector, strong

profitability and cash generation, we are Overweight and

believe investors should focus on the rails, select

manufacturers, and waste companies – especially those

leveraged to the US.


Overweight: Financials

Exhibit 65: Valuations Remain Relatively Attractive

Valuation Composite: Financials average z-score of P/E, NTM P/E, P/B, P/S and inverted DY

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

Valuation Composite vs S&P/TSX


Financials = Perpetual Pessimism

Despite outperforming for seven of the last 10 years,

negativity surrounding Financials has been a consistent and

overarching theme since 2008. In fact, our valuation

composite has been consistently below the long-run average

since 2008, and currently remains near cycle lows. As such,

we believe any reversion to historical averages will represent

a strong tailwind for the sector.

Exhibit 66: Operating Metrics Are Strong

Financials vs S&P/TSX: Profitability Metrics

18% 17% 16%

14% 12%

12%

10% 9% 9%

8%

6% 5% 5%

4%

2%

0% EBIT Margin Profit Margin ROE

Financials S&P/TSX

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES

Financials = Strong Operating Efficiency

Despite record loan loss provisioning and economic recession,

overall profitability within Financials has been relatively

stable and consistently above the market.

Combined with relatively low valuations and trough in

earnings, fundamentally Financials are clearly well positioned

for recovery.

Exhibit 67: Proxy Trade for Canada

15

14

13

12

11

10

9

8

Bank NTM PE vs Change in Foreign Flows Into Canadian Equities

80000 Corr: 22%

60000

40000

20000

0

-20000

-40000

-60000

-80000

-100000

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Bank NTM PE

Net Foreign Investment in Canadian Equities (YoY Change)


Financials = Canada Proxy Trade and Valuation Reversion

Financials remain the proxy trade for Canadian equities. For

instance, the sector tends to underperform when foreign

interest wanes, but should significantly benefit if/when

foreign interest returns.

While we are steadfastly maintaining our holdings within our

highest conviction Canadian sector, we prefer those

companies with stronger US platforms - especially within the

banks (commercial banking + wealth management).


Market Weight: Communication Services and Consumer Staples (Downgrading to Market Weight From Overweight)

Exhibit 68: Communications = High Yield and Stable DPS Growth

10%

5%

0%

-5%

-10%

-15%

-20%

Dividend Yield and LTM DPS Growth by High Yield Sector

8% Sorted by Highest Dividend Yield

5% 5% 4% 4% 3% 3% 3%

-2%

Dividend Yield

LTM DPS Growth

-15%

PIPES COMM REAL UTIL TSX


Communication Services = One of the Most Effective Ways

to Add Yield

Our work has consistently shown Communication Services has

many of the hallmarks of a sector with sustainable long-term

dividend growth potential, particularly relative to the other

high dividend yield sectors.

While there certainly have been some challenges from

unbundling, over-regulation, and recent slowing in roaming

revenue, we believe most of these are manageable and/or

transient with the longer-term growth profile intact.

Exhibit 69: Staples = Stable and Troughing Earnings

Consumer Staples Blended EPS Growth avg of LTM and NTM

-40%

-30%

-20%

-10%

0%

10%

20%

30%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Blended EPS Growth vs S&P/TSX


Consumer Staples = Stable Earnings and Pricing Power

While the sector is moderately expensive, earnings growth

remains very stable combined with the strong opportunity of

pricing power in the quarters ahead. As such, we remain

selective within grocers and names that are more US focused.

Blended earnings growth, which measures the average of

LTM and NTM EPS growth, clearly held up better than most

sectors in the last few quarters, as growth remained positive

despite the economic shutdowns.

Exhibit 70: Late Cycle / Defensive

Average Relative Price Performance Consumer Staples and Communication Services

(During Various GDP Growth Environments) 10% 9%

8%

6% 5% 4.1%

4% 1.9%

2% 1%

0%

-2% -1%

-4% -2.6% CONS COMSV

-6% -5.9%

-8% <2% >2%, and <3% >3%, and <4% >4%


Communications Services / Consumer Staples = Late Cycle

/ Defensive

Communication Services has more late-cycle characteristics,

historically posting its best relative performance when the

economy is overheating.

Meanwhile, Consumer Staples is a classic defensive sector

posting its best relative performance when economic activity

is depressed.

As such, we have downgraded both sectors to Market Weight

as we shift our focus to the cyclicals.


Market Weight: Energy

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

Valuation Composite: Energy average z-score of P/E, NTM P/E, P/B, P/S and inverted DY


Exhibit 71: Record Low Valuations


Energy = Deep Value Sector

Energy stocks have been underperforming their fundamental

underpinnings for some time with valuations at or near

record lows on both an absolute basis and relative to the

broad market.

Given this extreme trough in valuations, there remains

significant room for valuation expansion if and when

underlying supply/demand dynamics meaningfully improve,

in our opinion.

Exhibit 72: Challenged Profitability

Return on Equity: Energy 30%

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%

1992

1993

1995

1996

1998

1999

2001

2002

2003

2005

2006

2008

2009

2010

2012

2013

2015

2016

2018

2019

ROE vs S&P/TSX


Energy = Profitability Collapses Again = More

Restructuring Required

While record low valuations and historical contrarian trends

after sharp drops in oil prices suggest the Energy sector could

see a significant rebound from current levels, the drop in

operating efficiency and the structural challenges of the

sector suggest a Market Weight is likely more appropriate, in

our opinion.

Furthermore, the challenged energy price environment

suggests dividend payouts are likely to continue to decline

over the coming quarters.

Exhibit 73: Market Perform in Range-Bound Oil Prices

Annualized Price Performance From Nov 1985 to Dec 2003

12% Composite

9.9% Energy 10% 9.1%

8% 6.9% 6.0%

6%

4%

2%

0% S&P 500 S&P/TSX


Energy = Market Perform During Oil Price Ranges

While we continue to believe oil prices are likely stuck in a

longer-term range similar to the 1980s and 1990s, our work

suggests range-bound markets are not necessarily negative

for Energy sector performance.

In fact, from November 1985 to December 2003, the last

extended range-bound period in WTI, the S&P/TSX Energy

sector was up 6.9% annualized, slightly outperforming the

broader S&P/TSX composite over this period.


Market Weight: Health Care (Upgrade to Market Weight From Underweight), Technology

Exhibit 74: Canadian Health Care = Cannabis

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019 0%

1%

2%

3%

4%

5%

6%

7%

Health Care: S&P/TSX Weight

HLTH

> Cannabis

BMO Capital Markets Investment Strategy Group, FactSet, S&P.

Health Care = Regulatory Tailwinds

Yes, Cannabis is now the dominant weight within Canadian

Health Care.

US regulatory tailwinds are likely to provide broad sentiment

support for the sector throughout 2021. Furthermore, recent

underperformance has brought the sector closer to reality on

supply and demand issues facing the sector.

Exhibit 75: Technology = Secular Outperformance

Performance 80%

60% 60%

44%

40% 27% 27% 26% 24%

20%

0%

-20%

-40%

-60%

-42%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

-26%

-7% -13%

10%

Information Technology Calendar Year Relative Price


Technology = Balance Between Secular Growth and

Elevated Valuation

There is no doubt that Technology has been a key area of

strength in both the US and Canada over the last eight years.

Indeed, secular growth trends continue to favour the sector.

As such, it is very difficult to be underweight the sector

despite elevated valuations and contrarian performance

indicators.

Exhibit 76: Technology = Elevated Valuation Dispersion

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Technology: NTM PE Dispersion STDEV NTM PE's in Sector/Average Sector NTM PE

70%

60%

50%

40%

30%

20%

10%

0%


Technology = Be Selective

Elevated valuation dispersion suggests a more active

approach in the sector is warranted within the Technology

sector.


Market Weight: Materials

Exhibit 77: A Tale of Two Sectors

Price to Book: S&P/TSX Materials Sector 3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Materials ex Gold Materials

BMO Capital Markets Investment Strategy Group, FactSet, IBES.

Materials = A Tale of Two Sectors

When we look at our z-scored valuation composite, which

averages several commonly used valuation metrics, the

Materials sector excluding gold is near the long-term

historical average. While this suggests the sector is not cheap,

it is significantly lower than the broad Materials sector and

gold stocks in particular.

This is further confirmed with price-to-book ratios, where the

broad Materials sector price-to-book is approaching the

highest level since 2010. However when gold is excluded,

price-to-book is actually near cycle lows.

Exhibit 78: Gold Earnings Strength vs. Ex-Gold Rebound

LTM EPS Growth: S&P/TSX Materials Sector 100%

80%

60%

40%

20%

0%

-20%

-40%

-60%

-80% 2011 2013 2015 2017 2019


Source: BMO Capital Markets Investment Strategy Group, Factset, IBES

Materials = Divergent Earnings Growth

Gold earnings growth has remained relatively strong and

positive as all the stars have aligned for the sector.

Meanwhile, non-gold Material stocks saw a sharp decline in

earnings, which has only recently started to rebound.

Exhibit 79: Gold and Non-Gold Are Generating Strong Cash Flow

Free Cash Flow Yield: S&P/TSX Materials Sector 10%

5%

0%

-5%

-10%

-15%



Materials = Cash Generation

While all the stars have clearly aligned for gold as a source of

stability and store of value, both Gold and Non-Gold Material

stocks have strong free cash flow.

Overall, while gold has been the clear driver of recent

performance we believe that investors, by quite simply

looking beyond just gold, can find select compelling value

opportunities within Materials that are poised to benefit from

rebounding commodities.


Underweight: Real Estate and Utilities (Downgrade to Underweight From Market Weight)

Exhibit 80: Real Estate = Growth Challenges to Persist

Real Estate: Blended and NTM FFO Growth

20%

15%

10%

5%

0%

-5%

-10% 2006 2009 2012 2015 2018

Blended Relative Growth Rate NTM


Real Estate = Structurally Challenged

Yes, Real Estate historically posts its best performance during

range-bound rate environments; however, the sector faces

many structural challenges over the coming quarters which

are likely to limit FFO and dividend growth.

Exhibit 81: Utilities = Best Performance When Rates Are Declining

S&P/TSX Utilities vs Composite Average Rolling 1Yr Relative Performance Based on Year-to-Year Change in

10Yr US Treasury Yield monthly data, beginning 1990

20% 13.6% 15% 9.5% 10% 5% 0%

-5% -0.3% -10% -3.8%

-15% -10.0% -20% -25% -18.8%

Less than - Between - Between - Between 0 Between 50 Greater 100 bps 100 bps 50 bps and bps and 50 bps and than 100

and -50 bps 0 bps bps 100 bps bps

Year-to-Year Change in 10Yr Treasury Yield

Source: BMO Capital Markets Investment Strategy Group, FactSet, FRB

Utilities = Ultimate Rate Sensitive Sector

Utilities is the most classic rate-sensitive sector, posting its

best relative performance when interest rates are declining

sharply and underperforming when interest rates start to

stabilize and creep higher.

Exhibit 82: Utilities = Elevated Valuations

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

Valuation Composite: Utilities average z-score of P/E, NTM P/E, P/B, P/S and inverted DY



Utilities = Relatively Expensive

Our z-scored valuation composite remains well above the

one-standard deviation level, with Utilities among the most

expensive sectors in the TSX.

As such, rising yields, low organic growth and high payout

ratios are a tough combination. Areas to focus on would be

renewables and non-regulated Utilities.


Canadian Size Opinions

Exhibit 83: Canadian Size Opinions Sector Opinion Comments

Large cap OW Valuations are generally more expensive than small cap. However, earnings growth remains more stable and profitability is strong. Resource sectors display significantly higher quality metrics than small cap.

Small cap MWRelatively attractive valuations, but lower quality resource names add risk. Meanwhile, the non-resource small-cap namesare poised for a strong cyclical rebound.

Source: BMO Capital Markets Investment Strategy Group.

Key: OW: Overweight, MW: Market Weight, UW: Underweight

Large Cap Over Small Cap

Canadian small cap earnings collapsed significantly more than the large cap companies during the

COVID-19 shutdowns. While this earnings collapse is certainly an extreme, as we look out to the

quarters ahead, earnings growth has started to bottom and forward earnings growth continues to

improve.

Despite these relatively low small cap earnings multiples, other valuation metrics show small cap

valuations more in line with large cap names, suggesting investors should beware of value traps.

Bottom Line: While there continues to be many opportunities in the non-resource small cap sectors, we

continue to believe large cap stocks offer more stable fundamentals considering an increasingly volatile

market environment. Furthermore, any return in positive sentiment and foreign flows will likely reward

the higher-quality, undervalued large cap stocks. (see October 22, 2020 Snapshot for details)

Exhibit 84: Small Cap Underperformance Driven by Resources

Relative Price: Small Caps versus Large Caps ex Resources

SML/TSX 1.60

SML/TSX ex Resources

1.40

1.20

1.00

0.80

0.60

0.40

1998

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2013

2014

2015

2016

2017

2018

2019

2020


Exhibit 85: Large Cap Growth Stronger and More Consistent

Blended Median EPS Growth: Small Caps vs Large Caps avg of LTM & NTM

30%

20%

10%

0%

-10%

-20%

-30%

-40% S&P/TSX

-50%

SML

SML ex Resources

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES


https://researchglobal0.bmocapitalmarkets.com/research/df360a90-5ac5-4aa0-85fa-87ea4e37ddcd/

IMPORTANT DISCLOSURES

Analyst's Certification

I, Brian G. Belski, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.

Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Company Specific Disclosures

For Important Disclosures on the stocks discussed in this report, please go to https://researchglobal0.bmocapitalmarkets.com/public-disclosure/.

Distribution of Ratings (November 18, 2020)

Rating category BMO rating BMOCM US Universe*

BMOCM US IB Clients**

BMOCM US IB Clients***

BMOCM Universe****

BMOCM IB Clients*****

StarMine Universe~

Buy Outperform 48.8 % 29.6 % 56.8 % 50.1 % 58.1 % 57.7%

Hold Market Perform 48.8 % 21.3 % 40.9 % 47.7 % 40.9 % 37.5%

Sell Underperform 2.3 % 25.0 % 2.3 % 2.2 % 1.0 % 4.8%

* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts. ** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as percentage within ratings category. *** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as percentage of Investment Banking clients. **** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts. ***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as percentage of Investment Banking clients. ~ As of April 1, 2019.

Ratings Key (as of October 2016)

We use the following ratings system definitions: OP = Outperform - Forecast to outperform the analyst’s coverage universe on a total return basis; Mkt = Market Perform - Forecast to perform roughly in line with the analyst’s coverage universe on a total return basis; Und = Underperform - Forecast to underperform the analyst’s coverage universe on a total return basis; (S) = Speculative investment; Spd = Suspended - Coverage and rating suspended until coverage is reinstated; NR = No Rated - No rating at this time; and R = Restricted - Dissemination of research is currently restricted.

The total return potential, target price and the associated time horizon is 12 months unless otherwise stated in each report. BMO Capital Markets' seven Top 15 lists guide investors to our best ideas according to different objectives (CDN Large Cap, CDN Small Cap, US Large Cap, US Small Cap, Income, CDN Quant, and US Quant have replaced the Top Pick rating).

Prior BMO Capital Markets Rating System

(April 2013 - October 2016) http://researchglobal.bmocapitalmarkets.com/documents/2013/rating_key_2013_to_2016.pdf

(January 2010 - April 2013) http://researchglobal.bmocapitalmarkets.com/documents/2013/prior_rating_system.pdf

Other Important Disclosures


https://researchglobal0.bmocapitalmarkets.com/public-disclosure/

http://researchglobal.bmocapitalmarkets.com/documents/2013/rating_key_2013_to_2016.pdf?pdf

http://researchglobal.bmocapitalmarkets.com/documents/2013/prior_rating_system.pdf?pdf

For Important Disclosures on the stocks discussed in this report, please go to https://researchglobal0.bmocapitalmarkets.com/public-disclosure/ or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036 or Editorial Department, BMO Capital Markets, 1 First Canadian Place, Toronto, Ontario, M5X 1H3.

Dissemination of Research

Dissemination of fundamental BMO Capital Markets Equity Research is available via our website https:// researchglobal0.bmocapitalmarkets.com/. Institutional clients may also simultaneously receive our fundamental research via email and/or via services such as Refinitiv, Bloomberg, FactSet, Visible Alpha, and S&P Capital IQ.

BMO Capital Markets issues a variety of research products in addition to fundamental research. Institutional clients may request notification when additional research content is made available on our website. BMO Capital Markets may use proprietary models in the preparation of reports. Material information about such models may be obtained by contacting the research analyst directly. There is no planned frequency of model updates.

The analyst(s) named in this report may discuss trading strategies that reference a catalyst or event that may have a near or long term impact on the market price of the equity securities discussed. In some cases, the impact may directionally counter the analyst’s published 12 month target price and rating. Any such trading or alternative strategies can be based on differing time horizons, methodologies, or otherwise and are distinct from and do not affect the analysts' fundamental equity rating in the report.

Research coverage of licensed cannabis producers and other cannabis-related companies is made available only to eligible approved North American, Australian, and EU-based BMO Nesbitt Burns Inc., BMO Capital Markets Limited, Bank of Montreal Europe Plc and BMO Capital Markets Corp. clients via email, our website and select third party platforms.

~ Research distribution and approval times are provided on the cover of each report. Times are approximations as system and distribution processes are not exact and can vary based on the sender and recipients’ services. Unless otherwise noted, times are Eastern Standard and when two times are provided, the approval time precedes the distribution time.

For recommendations disseminated during the preceding 12-month period, please visit: https://researchglobal0.bmocapitalmarkets.com/public-disclosure/.

General Disclaimer

"BMO Capital Markets" is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. (member FDIC), Bank of Montreal Europe p.l.c, and Bank of Montreal (China) Co. Ltd, the institutional broker dealer business of BMO Capital Markets Corp. (Member FINRA and SIPC) and the agency broker dealer business of Clearpool Execution Services, LLC (Member FINRA and SIPC) in the U.S., and the institutional broker dealer businesses of BMO Nesbitt Burns Inc. (Member Investment Industry Regulatory Organization of Canada and Member Canadian Investor Protection Fund) in Canada and Asia, Bank of Montreal Europe p.l.c. (authorised and regulated by the Central Bank of Ireland) in Europe and BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in the UK and Australia. Bank of Montreal or its subsidiaries ("BMO Financial Group") has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMO Capital Markets endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. Nothing herein constitutes any investment, legal, tax or other advice nor is it to be relied on in any investment or decision. If you are in doubt about any of the contents of this document, the reader should obtain independent professional advice. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. BMO Capital Markets or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets or its affiliates, officers, directors or employees have a long or short position in many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that BMO Capital Markets or its affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein.

Additional Matters

This report is directed only at entities or persons in jurisdictions or countries where access to and use of the information is not contrary to local laws or regulations. Its contents have not been reviewed by any regulatory authority. BMO Capital Markets does not represent that this report may be lawfully distributed or that any financial products may be lawfully offered or dealt with, in compliance with regulatory requirements in other jurisdictions, or pursuant to an exemption available thereunder.

To Australian residents: BMO Capital Markets Limited is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and is regulated by the UK Financial Conduct Authority under UK laws, which differ from Australian laws. This document is only intended for wholesale clients (as defined in the Corporations Act 2001) and Eligible Counterparties or Professional Clients (as defined in Annex II to MiFID II).



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To Canadian Residents: BMO Nesbitt Burns Inc. furnishes this report to Canadian residents and accepts responsibility for the contents herein subject to the terms set out above. Any Canadian person wishing to effect transactions in any of the securities included in this report should do so through BMO Nesbitt Burns Inc.

The following applies if this research was prepared in whole or in part by Colin Hamilton, Alexander Pearce, Raj Ray, David Round or Edward Sterck: This research is not prepared subject to Canadian disclosure requirements. This research is prepared by BMO Capital Markets Limited and distributed by BMO Capital Markets Limited or Bank of Montreal Europe Plc and is subject to the regulations of the Financial Conduct Authority (FCA) in the United Kingdom and the Central Bank of Ireland (CBI) in Ireland. FCA and CBI regulations require that a firm providing research disclose its ownership interest in the issuer that is the subject of the research if it and its affiliates own 5% or more of the equity of the issuer. Canadian regulations require that a firm providing research disclose its ownership interest in the issuer that is the subject of the research if it and its affiliates own 1% or more of the equity of the issuer that is the subject of the research. Therefore each of BMO Capital Markets Limited and Bank of Montreal Europe Plc will disclose its and its affiliates’ ownership interest in the subject issuer only if such ownership exceeds 5% of the equity of the issuer.

To E.U. Residents: In an E.U. Member State this document is issued and distributed by Bank of Montreal Europe plc which is authorised and regulated in Ireland and operates in the E.U. on a passported basis. This document is only intended for Eligible Counterparties or Professional Clients, as defined in Annex II to “Markets in Financial Instruments Directive” 2014/65/EU (“MiFID II”).

Singapore: This disclaimer applies to research reports distributed by the Private Banking unit of Bank of Montreal, Singapore Branch ("BMO SG"), an exempt financial adviser under the Financial Advisers Act (Cap. 110) of Singapore ("FAA") only. This research report is prepared by BMO Capital Markets and distributed by BMO SG pursuant to an arrangement under regulation 32C of the Financial Advisers Regulations of Singapore. This research report is distributed by BMO SG solely to persons who qualify as accredited investors as defined in the FAA only, and is not intended for and may not be circulated to the general public. This report and any information contained in this report shall not be disclosed to any other person. If you are not an accredited investor, please disregard this report. BMO SG does not accept legal responsibility for the contents of the report. Recipients should contact BMO SG at 65-6535 2323 for matters arising from, or in connection with the report.

To U.S. Residents: BMO Capital Markets Corp. furnishes this report to U.S. residents and accepts responsibility for the contents herein, except to the extent that it refers to securities of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Capital Markets Corp.

To U.K. Residents: In the UK this document is published by BMO Capital Markets Limited which is authorised and regulated by the Financial Conduct Authority. The contents hereof are intended solely for the use of, and may only be issued or passed on to, (I) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (II) high net worth entities falling within Article 49(2)(a) to (d) of the Order (all such persons together referred to as "relevant persons"). The contents hereof are not intended for the use of and may not be issued or passed on to retail clients.

To Israeli residents: BMO Capital Markets is not licensed under the Israeli Law for the Regulation of Investment Advice, Investment Marketing and Portfolio Management of 1995 (the "Advice Law") nor does it carry insurance as required thereunder. This document is to be distributed solely to persons that are qualified clients (as defined under the Advice Law) and qualified investors under the Israeli Securities Law of 1968. This document represents the analysis of the analyst but there is no assurance that any assumption or estimation will materialize.

These documents are provided to you on the express understanding that they must be held in complete confidence and not republished, retransmitted, distributed, disclosed, or otherwise made available, in whole or in part, directly or indirectly, in hard or soft copy, through any means, to any person, except with the prior written consent of BMO Capital Markets.

Click here for data vendor disclosures when referenced within a BMO Capital Markets research document.

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate

banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States, personal and commercial banking clients are served by BMO Harris Bank N.A., (Member FDIC). Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets.

BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. (member FDIC), Bank of Montreal Europe p.l.c, and Bank of Montreal (China) Co. Ltd, the institutional broker dealer business of BMO Capital Markets Corp. (Member FINRA and SIPC) and the agency broker

dealer business of Clearpool Execution Services, LLC (Member FINRA and SIPC) in the U.S., and the institutional broker dealer businesses of BMO Nesbitt Burns Inc. (Member Investment Industry Regulatory Organization of Canada and Member Canadian Investor Protection Fund) in Canada and Asia, Bank of Montreal Europe p.l.c. (authorised and regulated by the Central Bank of Ireland) in Europe and BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in the UK and Australia.

“Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license.

® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere. TM Trademark Bank of Montreal

©COPYRIGHT 2020 BMO CAPITAL MARKETS CORP.

Investment Strategy | Page 34 A member of

November 19, 2020

http://research-ca.bmocapitalmarkets.com/documents/C17EA078-97CF-4438-AC2C-B5A8118F8C4B.PDF

Equity Research Analysts

Director of Canadian and UK Equity Research Bert Powell, CFA 416-359-5301

Associate Director − Canada Hari Sambasivam 416-359-8357

Director of US Equity Research Carl Kirst, CFA 212-885-4113

Associate Director − US Todd J. Jonasz 212-885-4051

Head of Product Management - US Timothy Pierotti 212-885-4033

ENERGY

Oil & Gas – Integrateds Randy Ollenberger 403-515-1502

Oil & Gas – E&P Phillip Jungwirth, CFA 303-436-1127 Ray Kwan, P.Eng. 403-515-1501 Mike Murphy, P.Geol. 403-515-1540 David Round, ACA +44 (0)20 7664 8052

Oil & Gas – Oilfield Services John Gibson, CFA 403-515-1527

Oil & Gas – Market Specialist Jared Dziuba, CFA 403-515-3672

CONSUMER DISCRETIONARY

Retailing/Consumer Peter Sklar, CPA, CA 416-359-5188

Retail & Services Simeon Siegel, CFA 212-885-4077

Cannabis Tamy Chen, CFA 416-359-5501 Peter Sklar, CPA, CA 416-359-5188

Restaurants Andrew Strelzik 212-885-4015

Toys, Games, and Leisure Gerrick L. Johnson 212-883-5192

Auto Parts Peter Sklar, CPA, CA 416-359-5188

Education Jeffrey M. Silber 212-885-4063

Special Situations Stephen MacLeod, CFA 416-359-8069 Jonathan Lamers, CFA 416-359-5253

REAL ESTATE

REITs (Canada) Jenny Ma, CFA 416-359-4955 Joanne Chen, CFA 416-359-8108

REITs (US) John P. Kim 212-885-4115 Juan C. Sanabria 312-845-4074 Ari Klein 212-885-4103 Frank Lee, CFA 415-591-2129

INFORMATION TECHNOLOGY

IT Services & Software Keith Bachman, CFA 212-885-4010

Information Technology Thanos Moschopoulos, CFA 416-359-5428

Semiconductors Ambrish Srivastava, Ph.D. 415-591-2116

Telecom/Media/Cable Tim Casey, CFA 416-359-4860

Internet and Media Daniel Salmon 212-885-4029

MATERIALS

Commodity Strategy Colin Hamilton +44 (0)20 7664 8172

Base Metals & Mining Rene Cartier, CPA, CA, CBV, CFA 416-359-5011 David Gagliano, CFA 212-885-4013 Alexander Pearce +44 (0)20 7246 5435 Jackie Przybylowski, P.Eng., CFA 416-359-6388 Edward Sterck +44 (0)20 7246 5421

Precious Metals & Minerals Andrew Mikitchook, P.Eng., CFA 416-359-5782 Brian Quast, P.Eng., JD 416-359-6824 Raj Ray, CFA, B.Eng. +44 (0)20 7246 5430 Ryan Thompson, CFA 416-359-6814

Fertilizers & Chemicals Joel Jackson, P.Eng., CFA 416-359-4250

US Chemicals John McNulty, CFA 212-885-4031

Packaging & Forest Products Mark Wilde, Ph.D. 212-883-5102 Ketan Mamtora 212-883-5121

CONSUMER STAPLES

Food Retail Kelly Bania 212-885-4162

Food & Ag Products Kenneth B. Zaslow, CFA 212-885-4017

UTILITIES

Electric Utilities & Independent Power Ben Pham, CFA 416-359-4061

Utilities, Power & Renewables James M. Thalacker 212-885-4007 HEALTHCARE

Biotechnology George Farmer 212-885-4016 Do Kim 212-885-4091 Matthew Luchini 212-885-4119

Managed Care/Facilities Matthew Borsch, CFA 212-885-4094

BioPharma Gary Nachman 212-883-5113

MACRO

Investment Strategy Brian G. Belski 212-885-4151

416-359-5761

ESG Strategy Doug A. Morrow 416-359-5463

Economics Douglas Porter, CFA 416-359-4887 Michael Gregory, CFA 312-845-5025

416-359-4747

Quantitative/Technical Jin Li 416-359-7689 Herbert Sun 416-359-6704

Exchange Traded Funds Jin Li 416-359-7689

INDUSTRIALS

Transportation & Aerospace Fadi Chamoun, CFA 416-359-6775

Diversified Industrials Devin Dodge, CFA 416-359-6774

Machinery Joel Tiss 212-883-5112

Business Services & Industrial Services Jeffrey M. Silber 212-885-4063

FINANCIALS

Canadian Banks & Asset Managers Sohrab Movahedi 416-359-7157

US Financial Services James Fotheringham 212-885-4180

Insurance/Diversified Financials (Canada) Tom MacKinnon, FSA, FCIA 416-359-4629

Diversified Financials (Canada) Étienne Ricard, CFA 416-359-5296 SPECIAL PROJECTS

Special Projects Kimberly Berman 416-359-5611 Gaurav Mathur 416-359-7072

1 First Canadian Place, P.O. Box 150, Toronto, ON M5X 1H3 416-359-4000 • 129 Saint-Jacques Street, 10th Floor, Montreal, Quebec H2Y 1L6 • 1400, 525 - 8th Avenue S.W., Calgary, AB. T2P 1G1 95 Queen Victoria Street, London, U.K., EC4V 4HG • 3 Times Square, 29th Floor, New York, NY 10036 212-885-4000 • 200 Tower Place, 3348 Peachtree Road, NE, Suite 1430, Atlanta, GA 30326 100 High Street, 26th Floor, Boston, MA 02110 617-451-0670 • 600 17th Street, Suite 1704S, South Tower, Denver, CO 80202 • 700 Louisiana Street, Suite 2100, Houston, TX 77002 713-546-9746

One Market, Spear Tower, Suite 1515, San Francisco, CA 94105 415-591-2100 • 115 S. LaSalle Street, Chicago, IL 60603

BMO CAPITAL MARKETS INVESTMENT STRATEGY: 2021 MARKET OUTLOOK

ABOUT BMO CAPITAL MARKETS

BMO Capital Markets is a leading, full-service North American-based financial services

provider offering corporate, institutional and government clients access to a complete range

of products and services. These include equity and debt underwriting, corporate lending

and project financing, merger and acquisitions advisory services, securitization, treasury

management, market risk management, debt and equity research and institutional sales

and trading. With approximately 2,700 professionals in 33 locations around the world,

including 19 offices in North America, BMO Capital Markets works proactively with clients to

provide innovative and integrated financial solutions.

BMO Capital Markets is a member of BMO Financial Group (NYSE, TSX: BMO), one of the

largest diversified financial services providers in North America with US$709 billion total

assets and over 44,000 employees as at April 30, 2020. For more information, visit

www.bmocm.com/.

www.bmocm.com

BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. (member FDIC), Bank of Montreal Europe p.l.c, and Bank of Montreal (China) Co. Ltd, the institutional broker dealer business of BMO Capital Markets Corp. (Member FINRA and SIPC) and the agency broker dealer business of Clearpool Execution Services, LLC (Member FINRA and SIPC) in the U.S., and the institutional broker dealer businesses of BMO Nesbitt Burns Inc. (Member Investment Industry Regulatory Organization of Canada and Member Canadian Investor Protection Fund) in Canada and Asia, Bank of Montreal Europe p.l.c. (authorised and regulated by the Central Bank of Ireland) in Europe and BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in the UK and Australia.

® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere. ™ Trademark Bank of Montreal

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