Insights and Strategies
Tariffs Continue to Cloud an Otherwise Good Outlook
Macro Highlights for January
- In Canada, we saw data for November, which was the weakest month of the year, but included one-time events such as multiple labour disruptions. We are expecting an offsetting rebound in December, helped in part by the tax holiday, which stretches to mid-February. Longer-term expectations are for 1.8% GDP growth in each of 2025 and 2026, up from 1.3% growth in 2024. The inflation picture continues to improve, with headline inflation at or below the 2.0% target for five months, enabling the Bank of Canada (BoC) to continue its rate easing cycle.
- In the U.S., the economy remained remarkably strong, with the estimated real GDP up 2.8% in 2024, after a 2.9% gain in 2023. We expect slower, but still above-potential growth of 2.4% in 2025 and 2.2% in 2026. Headline CPI was 2.9% in December, up from 2.7% in November, although core CPI declined slightly to 3.2% from 3.3%. The Fed has pushed out its timeframe for returning to 2.0% inflation from 2026 to 2027, with a more cautious approach to easing interest rates.
- Labour markets have shown slight softening, but the U.S. unemployment rate remains low at 4.0% and the Canadian unemployment rate had recently declined slightly to 6.6% as population growth has slowed. Immigration reforms are occurring on both sides of the border, that could put pressure on the unemployment rate, although disruptions from tariffs may increase layoffs and defer hiring decisions, more so in Canada.
Financial Markets in January
- In January, the TSX Composite, Canada's main stock market index, achieved a 3.3% price return and a 3.5% total return, outperforming the U.S. large-cap benchmark, the S&P 500, which recorded a 2.7% price return and a 2.8% total return in local currency.
- The TSX Composite's gains were mainly driven by the Materials and Info Tech sectors. In contrast, the S&P 500's performance was weighed down by the semiconductor industry due to threats from DeepSeek (a cheaper-to-train A.I. tool, using less advanced chips).
- We're now more than halfway through the 4Q24 earnings season, and the visibility remains promising. The S&P 500's forward-looking EPS grew by about 12% year-over-year in 4Q24, marking the highest growth rate since 4Q21.
Upcoming
- We expect further threats of tariffs throughout the year as President Trump addresses various grievances, and certainly through to the renegotiation of the USMCA trade agreement, which we would expect to be advanced from its current mid-2026 timetable.
- Notwithstanding the disruptive aspects of tariffs, our overarching expectations are for equity markets to move higher in 2025, on the back of the economic and corporate profit backdrop, but with more muted gains than the 20%+ returns of the last couple of years. Also expect heightened volatility, which could include multiple pullbacks along the way. Our (U.S. Investment Strategy Group’s) S&P 500 target to the end of 2025 is 6,375 using 23.5x EPS of US$270, with a preference for Technology, Industrials, and Health Care. For the TSX Composite, we forecast 26,300 by year-end for an 8.5% total return.
- We expect the BoC to continue cutting interest rates by 25 bps at each meeting until achieving a policy rate of 2.25% at the June meeting. The Fed is likely to cut more slowly while economic growth remains strong and the unemployment rate remains low. We expect to see 25 bp cuts mid-2025 and towards the end of the year, to bring the policy rate down to 4.00%.
