The S&P/TSX composite index will rebound from recent market turmoil to hit a record 15,000 within the next six months and climb to 16,200 by the end of 2008, says CIBC World Markets in a new report.

“The subprime mortgage meltdown in the U.S. is a temporary and non-lethal shock to the bull market in Canadian stocks,” says Jeff Rubin, chief strategist and chief economist at CIBC World Markets.

Although the report notes that some US$700 billion of painful resets in subprime mortgages will occur by the end of next year, Rubin believes the market has already priced in the worst of the subprime fallout.

“While delinquency rates are already at 15% — and up to 20% of outstanding subprime mortgages could end in default — it is now likely that financial markets have implicitly assumed a far more draconian outcome, creating an opportunity for arbitrage down the road,” he says.

Rubin also expects the U.S. Federal Reserve Board to address credit fears in the market by bringing in two quarter-point cuts in the lending rate over the next quarter.

With growth in the Canadian economy outperforming Bank of Canada expectations over the first half of the year, CIBC World Markets does not expect the Bank to match the U.S. Fed rate cuts and undo its July rate hike. However, liquidity concerns, particularly in the asset-backed commercial paper market, will see the Bank of Canada stay on the sidelines and shelve any further plans for tightening. With near-record oil prices and two Fed rate cuts, the Canadian dollar is likely to regain momentum and reach parity against the greenback by the end of the year, CIBC World Markets says.

While there’s some risk that the meltdown in the U.S. subprime mortgage market could bring North American economic growth down with it, Rubin sees little evidence of contagion effects to the U.S. consumer.

As a result of the recent market correction, CIBC World Markets is fine-tuning its equity portfolio by moving a full percentage point of weighting out of telecoms and moving a half-point into the heavily-sold base metals sector and a half-point to non-bank financials.