“It’s getting late, early.”
– Yogi Berra, New York Yankee Hall of Famer
July saw solid equity market results across the globe, while bond yields generally rose, delivering a mild negative for high-quality bond allocations. The month ushered in clarity across several fronts important to investors. After the U.S. inked a number of high-profile trade deals, including agreements with Europe and Japan, the trajectory of U.S. trade policy is now heading in a somewhat more optimistic direction than market watchers anticipated. Passage of the One Big Beautiful Bill brought certainty to near-term U.S. fiscal policy: it leans mildly stimulative, especially for corporations. Fiscal boosts across other major global economies continue to take shape. The focus is largely on spending, which is another plus for a broad swath of corporations.
Inflation rose slightly, an indication that tariffs are digestible – for now. Consumers continued to spend (modestly). Corporate earnings growth and margins also provided upside surprises, shedding a positive light on how businesses and households are navigating the changing landscape. In the U.S., earnings saw a return to glory for Big Tech companies; banks delivered strong results, too, raising expectations for upcoming S&P/TSX bank earnings.
Global central banks sat on the sidelines, waiting to see if the early constructive signs and trade deals hold, although they are biased toward easing monetary policy eventually. The ugly U.S. employment report released August 1 spiked expectations that rate cuts may come sooner rather than later.
Global trade – Rewired, not short-circuited
The U.S. is talking to, or has deals in place with, many of its large trading partners. Timelines for China and Mexico have been pushed out again while no agreement is in sight for Canada after negotiations stalled last week. Deals taking shape suggest the average U.S. tariff rate will land between 10% and 15%. Although it will vary by product, tariffs at this level can be managed through some combination of corporate margin compression among producers and suppliers, modest price increases passed on to consumers, currency swings, and product substitution/altered consumer choices.
August 1 – An abrupt shift in tone
Equity markets care about things that impact earnings, economic growth and interest rates. The prospect of a milder tariff regime and shared absorption across multiple layers of the economy means no single piece is burdened so much that a material re-pricing of stocks or bond yields will be required. This view is reinforced by the fact that few ill effects from tariffs have shown up in the U.S. economy or elsewhere (in the aggregate, acknowledging that some individual sectors/regions are seeing an impact). On August 1, heavy downward revisions to U.S. job creation numbers for May and June and a lacklustre July tally launched a challenge to the rosy narrative.
Equity markets tumbled to open August. Several factors were in play. Since April 7, equity markets had run up between 15% in Europe and 25% for the S&P 500, with all others sitting in between, so conditions were ripe for a breather. The downbeat employment data was accompanied by weak readings from the U.S. manufacturing sector, the latest bout of trade antagonism from President Donald Trump, and some geopolitics surrounding U.S. and Russian nuclear submarines. No wonder stocks tumbled.
We have cautioned that incoming data is going to be choppy, given trade disruptions and the uncertainty of on-again, off-again deals. Tariffs have been – and will continue to be – a shock. However, evidence is also emerging that the world is adapting. There are other positives, especially for corporations, that are also supportive.
Tariff impacts – Delayed, disguised, but not denied
Tariffs are a tax; real money is funneling into government coffers, and it must come from somewhere. Indeed, earnings reports from automakers and other industries impacted by tariffs made it concretely clear that U.S. businesses are paying these levies. This money coming out of the economy slows economic activity. However, money is moving into the economy as well. Many industries are seeing big positives: banks are performing very well, as are technology companies. Utility companies and industrials are benefitting from infrastructure buildouts and increased global defence spending.
There is a risk that a number of factors are masking the full picture. When businesses adopt mitigation strategies, then the blow to margins, corporate earnings and global growth (along with inflationary impacts) can be delayed or disguised. These strategies include the front-running of transactions; inventory drawdown; optimizing pricing (including raising prices globally by a small amount rather than a significant amount in the U.S. alone); supply chain/footprint optimization; adjusting business mixes; technology adoption; and reducing marketing spend. Some of these tactics make businesses more efficient.
Before tariffs came into effect last winter, many companies scrambled to rush activity and stockpile inventory while others took a wait-and-see stance. Although the pulling forward of expected purchases presents a downside risk to future sales and earnings, companies that held back on purchasing or delayed demand represent a potential upside.
What about Canada?
Despite new U.S. threats of 35% tariffs, Canada’s trade situation differs from that of most other nations. Approximately 90% or more of Canada’s exports to the U.S. are exempt under CUSMA and can continue crossing the border free of levies. That leaves this country with an average tariff rate lower than the rest of the world’s.
Blowout earnings from Canadian tech company Celestica, which supplies specialized components for data-centre builds, shows the global nature of the AI/digitization/electrification/data centre theme, and is an example of a Canadian company thriving despite tariff uncertainty.
We aren’t sugarcoating the situation for the Canadian economy. Renewed threats against Canada, the lack of a trade deal or extension, and the scheduled renegotiation of CUSMA in 2026 all bring uncertainty that weighs on our economy.
We reiterate, the S&P/TSX is not the Canadian economy – two-thirds of the TSX sits in financials, energy and materials. Tariffs on oil and critical minerals are 10%. Steel and aluminum are hurting, but U.S. buyers are bringing immense political pressure for relief as they have few substitute options in the near term. Copper looked like a big hit until most of it was exempted. The financial sector's U.S. earnings largely stem from operations domiciled in the U.S. – where there are no tariffs. Similarly, there are no tariffs on U.S. situs operations and many of Canada’s largest companies have extensive U.S. domiciled operations.
Blowing bubbles?
Markets are displaying some hallmarks of over-enthusiasm (elevated equity market valuations, market concentration in a few companies, meme stocks and crypto back in vogue), and some specific company valuations are hard to justify. However, we don’t believe we are in mania conditions. Equity market valuations are increasingly pricing in positive developments ahead, but the path toward those outcomes is reasonable, not bubble-ish.
Even areas where enthusiasm is running high (artificial intelligence and areas related to it) have qualities that are different from prior busts. The most damaging bubbles are inflated with debt, which fuelled the dotcom and housing busts. Today’s technology giants are mainly funding their extraordinary capital expenditures with their enormous cash flows. If AI disappoints and society ends up over-supplied with chips, power and data centres then things will end badly for sure. Still, it shouldn’t spark the same contagion or credit shock of past bubbles, where borrowed money and enthusiasm both evaporated.
The critical question isn’t “are we in a bubble?” Instead, the pertinent question is “what should we do about it?” Bubbles have been documented (always in hindsight) for hundreds of years. The earliest recorded – but probably not the first – was the Dutch tulip bubble in the 1630s. Stock markets develop bubbles from time to time (as do other assets); that’s the nature of the beast.
Bubbles are a feature of capitalism, not a bug. Stock markets are doing what they have always done and what society needs them to do in the face of discovery, innovation and productivity-enhancing tools. These ideas require money and rewards for the risk-takers who launched them. The growing number of companies that become involved over time need vetting. Capitalism does this, and stock markets are the arena where it all plays out.
Identifying the eventual winners in the early days and even in the middle innings is very hard. For the diversified, well-balanced investor, that is okay. As investors, we have choices. You don’t even have to play the game if you don’t want to. We can build portfolios of cash and bonds, and add dividend-paying, solid companies that have proven products or services with long track records that grow share prices over time.
However, most investors can benefit from exciting new areas of innovation and discovery. Savvy investors adjust their behaviour when they understand that bubbles are a part of investing. They’re not new, and we will see them again. You can do that by having well-diversified exposure to these areas. You don’t try to time these things, but you do trim them. You don’t get greedy; you take profits all the way along.
Bubbles eventually end, bringing tears and disappointment. By staying disciplined and rebalancing regularly for as long as the bubble lasts, you’ll harvest some of the opportunity and minimize the pain when the bubble does eventually burst.
Our strategy – Balanced, with an equity bias
We are balancing our constructive medium-term outlook (eight to 10 months out) with the near-term uncertainty. Valuations and sentiment are poor timing tools; we are allowing winners to run, but we won’t abandon our discipline. We continue to be ready for choppy conditions in capital markets during the back half of 2025.
We remain slightly overweight Canadian and U.S. equities and neutral weight to developed international markets and emerging markets. All these geographic positions have tested our resolve over the past few years, but remaining diversified has paid off. Each of the equity regions has contributed at various points in time; Canadian and other non-U.S. markets are the top performers so far in 2025. Currently, fixed income and U.S. small and medium (SMID) equity allocations are testing our patience.
Fixed income remains a ballast to our portfolios. While weak in July, the year-to-date contribution is positive, albeit shy of where we forecast. The silver lining is that interest income generated through our well-diversified, core fixed-income solution remains a robust 4%. The abrupt narrative shift at the beginning of August ushered in a risk-off tone. We were pleased to see our fixed income allocations delivered a solid positive return against the equity market dip.
Within small- and mid-cap (SMID) equity allocations (small and medium-sized companies in the U.S. and Canada), Canadian small caps are delivering solid performance while their U.S. counterparts are lagging. The argument remains sound for smaller companies, which have a track record of delivering excess returns. In the near term, U.S. large-cap valuations are stretched, so SMID stocks represent good value. They can benefit from U.S. protectionism and reshoring, pro-growth policies, a renewed emphasis on U.S. competitiveness, targeted tax breaks, deregulation, and lower borrowing costs through central bank rate cuts. U.S. SMID companies represent an attractive growth and diversification opportunity that we continue to use in moderation for more risk-tolerant, growth-oriented portfolios.
The last word – Capital markets are forward looking
Global earnings growth estimates for 2026 range from 11% for the Canadian S&P/TSX to almost 14% for the S&P 500; international and emerging markets are in between. Given the disruption this year, we will not be surprised if investors pay less attention to the rest of 2025’s earnings and economic data. There is enough noise to support both bullish and bearish cases. If we are correct, and enough evidence continues to point to a solid 2026, investors may eagerly price in those outcomes earlier than usual in the calendar year. We suspect a hiccup or two might come along.
However, with expectations for loosening credit conditions, central bank cuts bringing cheaper money, and large cash holdings on household and business balance sheets (money market funds are swelling), a lot of dry powder is available to invest in equity markets. Under these conditions, if we do have setbacks (which we inevitably will) they should be short-lived. Equity markets continuing to soar might feel as though it’s getting late in the year early. Let’s trot out another Yogi-ism: “It ain’t over ‘til it’s over.”
