While he wasn’t invited, Donald Trump still made his presence felt at the Outlook for 2025 conference held in Old Montreal before an audience of one hundred BMO customers. It could hardly have been otherwise, given that well before he returned to power, the US President had been making threat after threat to Canada.
Led by Mario Rigante, Regional President, BMO Private Wealth, the event featured Stéphane Rochon, Vice President & Managing Director, Head of Research Analyst Group, BMO Private Wealth, and Richard Belley, Vice President and Managing Director, Fixed Income Strategist and Portfolio Manager, BMO Private Wealth. The panelists covered a wide range of topics, from tariffs to the investment opportunities they see for the coming year.
Fluctuating economic forecasts
Trump promised to impose tariffs on us as soon as he was sworn in, but markets are still waiting to see if he’ll follow through on this threat. Since returning to the White House, he’s also called for studies on the US structural trade deficit.
Experts insist that he still intends to impose tariffs on Canada—possibly starting on March 12—but that remains to be confirmed, explained Stéphane Rochon. “Between shifting deadlines and the time needed to conduct a detailed analysis, it’s hard to assess the impact that tariffs will have on the economy, or whether we’ll even see any,” he added.
His colleague Richard Belley agreed: “Donald Trump is making any kind of economic modelling virtually impossible.” To deal with the uncertainty, Belley explained that we’re “relying on a scenario that involves political change in the US, and possibly in Canada, to see what impact there will be on our economy in 2025.”
In addition to the tariff threat, he’s watching inflation in particular, as it’s a source of concern for bond managers. “For me the biggest risk isn’t Trump: It’s economic policies, pro-growth governments and rising debt,” he said. “I’m worried that inflation will remain high.”
Time for caution
While both panelists remain generally optimistic about the economy’s resilience, they didn’t want to play down the risk. “What will happen if we get into a tariff war? An economic slowdown and a rise in the unemployment rate, which will ultimately mean a weaker job market and a weaker economy,” said Belley.
For his part, Rochon views Trump’s deregulation promises with skepticism, because many of the regulations were put in place for good reason. He considered the financial sector in particular—banks and life insurance companies—whose share prices surged when Trump was elected. “Deregulation can create an incentive, a moral hazard, which in turn could lead to a housing bubble like the one in 2008. I’m not saying it’s going to happen in 2025, but we need to be careful,” he said.
Artificial intelligence to the rescue
The sudden rise of artificial intelligence could transform a number of sectors as early as this year. While much of the attention has been focused on the companies developing the models and chips that power AI, Rochon believes this new technology could disrupt other sectors, such as healthcare.
In his view, the pharmaceutical industry is one that stands to benefit considerably. He pointed out that in 2025, the US Food and Drug Administration will approve the very first drugs developed by artificial intelligence. “Creating a new drug costs from $2 billion to $3 billion US, but AI could cut that cost in half,” he said. “We’re talking about major efficiency improvements in a sector that’s currently struggling but could see strong performance in 2025.”
Belley also sees strong potential in this sector. “It includes a lot of high-quality bonds with strong credit ratings that offer high yields. It’s an attractive sector for us,” he said.
Utilities and major industry
The industrial sector is another one to watch, explained Rochon, noting that many of its businesses are experiencing renewed momentum. He cited the most recent study by the Institute for Supply Management, which surveyed hundreds of businesses and shows their order books are filling up at a steady pace. Why is this good news? “Because there’s a strong correlation between the results of this survey and the performance of industrial shares,” he noted.
Comparing their recent performance to their historical averages, Rochon suggests that this sector may be undervalued. “Remember that these are oligopolies,” he said. While they’re really bad for consumers, they’re very, very good for investors because they maintain very high profit margins.”
As for utilities, Rochon values them for their affordability and because they’re natural monopolies, “especially when it comes to electricity distribution.” He mentioned in particular the Canadian company Fortis, which owns transmission lines in the US, as a company of the future. This is because developing AI requires an enormous amount of electricity.
A more selective approach
One thing is certain: Investors will need to be much more selective in their share purchases this year. They shouldn’t rush to buy the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla)—which have dominated the market in recent years—whenever the markets drop.
“Everyone owns these shares, to the point where 10 companies now account for 40% of the market. The day they face headwinds, things could go wrong,” Rochon said.
At a similar event in Toronto a week earlier, Brian Belski, Chief Investment Strategist, BMO Capital Markets, also spoke on this topic.
He noted that Apple’s market capitalization is equal to the entire Canadian market, so investors need to look beyond the largest companies in the index. The opportunity is there, he added, asserting that the US bull market is alive and well. He predicts that this year the S&P 500 will reach 6,700 points, for a 1,000-point gain.
“We’re in a period where we’re going to be making money for a while,” he said. His main message to help us adapt in the coming year is to control what you can.
And how do we do that? By investing in large companies that produce goods we use every day and by buying products we already know. “The best companies in the world are right here in North America,” he asserted.
For more information, please speak to your financial advisor at BMO Private Wealth.
