Canada’s stock market is poised for a good year of returns in 2024, experts say, with a pause in the interest rate environment expected to lift several key sectors higher.

Canada's stock market underperformed its U.S. counterpart in 2023 is because it is more cyclical, and its three main sectors – financials, oil and gas and materials – had a poor year, Paul Harris, partner and portfolio manager at Harris Douglas Asset Management, told BNN.Bloomberg.ca in a phone interview.

But Harris thinks this will change in the year ahead, as a rate pause from the Bank of Canada offers more predictability for key sectors.

“I think that interest rate stability will lead to better returns in financials and utilities, and I think you need those two things to do well for the TSX to do well,” Harris said.

Financials and utilities make up a significant portion of the index, Harris explained, noting that he thinks banks in particular are positioned for a good year in 2024.

“Banks have been underperformed for the past two years, and historically it’s very unlikely for that to continue a third year in a row,” he said.

Many Canadian banks posted weaker-than-expected earnings in the fourth quarter. While pressures are expected to continue in the quarters ahead, Harris said investors and analysts have now baked that into their expectations.

“Don’t forget that if the banks do happen to do even slightly better than forecasted, that will send the stocks higher,” he added.

As for utilities, Harris said he thinks the majority of the Bank of Canada’s interest rate hikes are behind them – a positive sign for the rate-sensitive sector.

“The Bank of Canada overnight lending rate is at five per cent and rates most certainly won’t rise to another five per cent per cent this year,” he said.

INFLATIONARY FEARS

Investors are still wary of inflation, but another investment professional said he thinks those fears may be already factored into market outlooks for next year.

“The biggest fear from investors right now is to see inflation reaccelerate. However, I think this fear may already be baked into the markets,” Bruce Campbell, president and portfolio manager at StoneCastle Investment Management, told BNNBloomberg.ca.

“While a climb in inflation would be a risk to the market, it certainly won’t be devastating,” he added.

Asides from this, the biggest Campbell sees for the TSX in 2024 could be a “black swan event” that no one sees coming.

“There’s always the potential risk that comes from a surprise,” he said.