Canaccord Capital Corp. analyst, Michael Manford, suggests that the U.S. economy may enjoy a V-shaped recovery, which will send stock markets higher as well.

“We now have enough information to conclude that the U.S. will have a V-shaped recovery, starting very early next year,” says Manford in a new report. “The inventory cycle has bottomed, there is massive fiscal and monetary stimulus in the economy and the consumer has resurfaced. In fact, the direct monetary and fiscal stimulus now adds up to over 2% of GDP. After a modest first quarter, we expect these three cycles to generate a decent 4% real growth in the second, third and fourth quarters.”

He notes that the Enron affair may trigger one last rate cut by the Fed, but he cautions against it. “We think that another cut would be a mistake at this point. In our view, the Fed is in grave danger of over-stimulating this economy. In fact, even if the Fed does not cut rates again, we expect them to start rising as early as the middle of next year as the Fed turns neutral.”

Manford says the current rally may continue in the short run. “However, once the recovery gets in gear, we expect to see S & P 500 earnings rebound by 25% in the first year, on the back of a 39% drubbing in the last year. That rebound should carry the S & P 500 to the 1400 area by the end of next year, even with higher interest rates.”

The Canadian economy is mimicking the U.S. pretty closely, Manford says. “Canada posted a recession in the second half of this year and will have to await the U.S. recovery to get back in gear. But, as the U.S. gathers speed, we expect Canadian real GDP growth to rebound into the 3.5-4% area by the middle of next year. The Bank of Canada has likely finished easing and may well have to start to raise rates in the third quarter of next year.”

The Canadian equity markets continue to be cheap by any measures, says Manford. “P/E ratios are still a full 4 points under fair value. Fair value on the TSE 300 Index is well over the 8000 mark. The return to normal valuation and the profit rebound should easily carry the TSE 300 Index into the 8800-8900 next fall.”