Although geopolitical uncertainty persists and investors remain cautious, the investment outlook remains constructive. What events could influence the trajectory of the markets in the months ahead? Our Investment Strategist, Louis Lajoie, examines the issue in just 5 minutes, with 4 charts and 3 key takeaways.
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Hello, everyone. Today, September 11, we will briefly look back at what turned out to be a rather eventful summer for financial markets and then look ahead to what is also likely to be a very eventful year-end.
As we speak, most investors’ attention is turning to bond markets, where returns have been rather disappointing since the start of the year. As of yesterday, returns were slightly negative for the Canadian bond market. We’ll come back to that in a moment. On the equity side, however, the overall picture remains very positive. Markets are still on track for a fourth consecutive year of strong returns, with results that are quite comparable across developed countries and even stronger in emerging markets. Although we have seen much more volatility on this front—especially early in the quarter, as investors took profits on many of the winning trades from the second quarter—most of those trades were in the AI space, which carries significant weight in emerging markets. But we quickly saw that the floor beneath equity markets remained very solid.
That floor is made from earnings, which have continued to beat expectations, growing by almost 40% over the past year in some cases. That is unprecedented at this stage of the business cycle. To be clear, this growth will slow in the coming year. Even then, expectations still point to growth well above historical averages, which would, in all likelihood, be sufficient to keep equity markets well supported.
Now, if this outlook proves overly optimistic, there are also reasons to believe that we are not facing the kind of downside risks we faced 26 years ago during the infamous tech bubble. Back then, if you focus on growth equities, earnings were slowing quite substantially while valuations kept on inflating, ultimately leading to a rather rude awakening that lasted a couple of years. Nowadays, we are seeing the opposite: unprecedented earnings growth and valuations near their lowest point in the last decade. This leads us to believe that investors may, in fact, be more rational than they appear.
That does not mean we face no downside risk whatsoever. There are definitely a lot of risks out there, many of which are converging in bond markets, which are, in effect, attempting to breach—or actually breaching slightly above —their trading range of the past three years. This is not the first time this has happened. Before the U.S. presidential election, these ups and downs used to be marked by the highs and lows in Fed rates expectations. Since the 2024 U.S. election, these ups and downs—these turning points—have actually been marked by policy decisions from the Trump administration. And nowadays, as we speak, we are essentially facing both. Bond investors are growing impatient to see a minimum of stability on the energy front and in the Middle East, but also the Federal Reserve is going impatient to see inflation slow down and is actively considering hiking rates very soon. If history is any guide, we may be very near a maximum pressure point, which could create the conditions for things to calm down. But in this day and age, nothing is guaranteed. So, we have to remain very watchful.
In summary, over the summer months, we’ve seen investors hesitate initially in the face of AI, growingly with regards to what was going on and it's still going on in the Middle East and its impact on energy prices and its impact on monetary policy. That has not prevented equity markets from remaining well supported by earnings, and this remains our base case for the next couple of months. The next couple of months are going to be very eventful. We are simultaneously facing a U.S. administration that must stabilize the situation in the Middle East, on the energy front. We are also facing a Federal Reserve that will soon decide whether to raise its policy rate. And U.S. voters will cast their ballots in the midterm elections in early November. We will have a lot to discuss during our next webcast in December. Until then, thank you for listening, and I wish you all a very good year-end.
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