Highlights
Unprecedented tariff shock, growing budget deficits, turmoil in the Middle East: financial markets have been put through a genuine stress test in recent months.
Despite the magnitude of the challenge, the picture remains positive for investors halfway through 2025, with markets buoyed by the relative resilience of the economy, low inflation, and a U.S. president in negotiation mode.
What follows is not clear of risk, as economic growth is set to slow under the weight of tariffs and high interest rates, while the next chapter in U.S. trade policy remains to be unveiled. Nevertheless, there are encouraging signs.
Besides, a certain wave of optimism seems to be benefitting Canadian stocks in particular, despite the current weakness of the domestic economy. What is going on?
While the composition of the S&P/TSX explains part of the phenomenon, investors mostly seem inclined to place greater value on increasingly appealing long-term earnings growth prospects, a trend that has room to continue.
To sum up, equity markets are likely to experience a period of consolidation in the face of somewhat weaker economic data this summer. However, the absence of a recession, the likely beginning of stabilization in U.S. trade relations, and a potential change in tone from the Fed should keep equity markets on an upward trend in the second half of the year.
Bottom Line
Although the economic backdrop remains fragile, our conviction in our base-case scenario of weak but positive growth has strengthened since the previous quarter, as the risks of recession have diminished. This backdrop calls for a moderately pro-risk stance, while maintaining room to adjust as the macro situation clarifies.