For the second consecutive year, stock indices in North America delivered excellent performance in 2024. This growth was supported by a relatively controlled reduction in interest rates orchestrated by the major global central banks. The U.S. Federal Reserve successfully executed a soft landing for the economy, reducing inflation while maintaining solid economic growth. This favorable environment boosted corporate earnings and robust consumer spending throughout the year. The technology sectors, particularly those tied to artificial intelligence, were major contributors to this performance. Additionally, enthusiasm surrounding Trump’s election also supported the markets toward the end of the year.

Our portfolios performed in line with their benchmarks in 2024, following significant outperformance between 2021 and 2023, particularly in 2022 when markets declined by 15%. This allowed us to achieve our objective of outperforming our benchmarks over the long term, with lower volatility, by capturing upside gains and minimizing losses during downturns.
However, the end of 2024 was more complex. Markets lost 7% of their gains following Trump’s election. December was the most challenging month since May 2023. This correction was driven by more restrictive central bank forecasts and rising political uncertainty amidst geopolitical tensions and trade policies.

Interest Rates and the Bond Market

Employment in the U.S. remains robust, with low unemployment rates and a high number of job vacancies. Projections for 2025 anticipate only one rate cut in the U.S. and two in Canada, reductions that are much smaller than previously expected. Since early December, these developments have led to higher bond yields and declines in equity markets. Furthermore, the economic policies of the new Trump administration could reignite inflationary pressures.
For several years, we have remained skeptical about achieving a sustained 2% inflation target. In 2024, the slowdown in inflation was partly facilitated by a 10% drop in gasoline prices. However, the recent 15% increase in oil prices and interest rate reductions could fuel a new wave of inflationary pressures.
Long-term inflation is currently estimated by markets at 3.3%. U.S. 10-year bond yields have reached levels comparable to 2017, reflecting a growing perception of persistent inflation. Higher rates now offer better bond yields with reduced risk. We favor short-term, high-quality bonds that provide strong after-tax yields.

Canada’s Performance Compared to the U.S.

Contrary to most analysts predicting a continued decline of Canada relative to the U.S., we believe the country may be nearing a long-term bottom.
Canada’s economic challenges are well known. Since the end of the pandemic, GDP per capita has dropped by 5%, strong immigration hiding structural issues such as stagnant productivity. Consumer confidence remains low, with a higher savings rate than in the U.S., limiting growth.
Higher interest rates in the U.S. (+1.25% compared to Canada) support a strong U.S. dollar, which has reached record levels since 2015. Trump’s tariff threats exacerbate concerns, given that 20% of Canada’s GDP depends on exports to the U.S. However, Canada remains the largest buyer of American goods. Canada’s $69 billion trade surplus with the U.S. stems from its oil exports to the U.S.

The U.S. accounts for 4% of the world’s population, 25% of global GDP, and over 67% of global market capitalization—a level unprecedented in history. The closest comparison is Japan in 1989 when its economy accounted for less than 20% of global GDP, yet its market capitalization represented 45% of the global stock index.

Finally, while Trump has promised tax cuts, the U.S. faces a budget deficit of 6.7% of GDP in 2024, the highest since 1945 (excluding 2020). At the same time, the reduction in credit card debt in December 2024 indicates increased consumer caution.
These factors lead us to believe that U.S. outperformance relative to the rest of the world may plateau. The Canadian market, which is more affordable and better positioned to handle inflation, could outperform in the next economic cycle.

Market Outlook for 2025

As recent history has shown, making predictions is risky. We do not anticipate a significant market downturn, as economic growth remains healthy, and both consumers and businesses are in good financial positions. However, we believe investors should not expect returns like the past two years.
The U.S. market has experienced two consecutive years of strong gains five times in the past 150 years, and in four of those cases, a decline followed. Since 2022, U.S. market gains have outpaced earnings growth. This growth has been highly concentrated in a small number of companies, particularly in technology and artificial intelligence sectors. In 2024, seven companies accounted for 53% of U.S. market gains, and only 28% of stocks outperformed the index—the lowest level in 50 years.

This situation has significantly increased the price-to-earnings (P/E) ratio to 24x, well above its historical average. In 2023, investor pessimism was a positive indicator, but this is no longer the case, as the market now expects a 15% increase in earnings in 2025. Investors are very optimistic.
Given economic, political, and geopolitical uncertainties, we maintain a selective approach, focusing on high-quality stocks and prudent diversification. We will continue to adapt our strategies to changing market conditions.

Sector Positioning Overview

Financials

This sector, the largest in Canada, remains where we are most underweighted, with 10% of our holdings compared to 25% for our benchmark. The sector performed well in 2024 despite negligible earnings growth. Investors favored it due to slowing inflation without a recession and Trump’s election. Banks remain difficult to analyze, and forecasting their future performance is complex. In Canada, 40% of mortgages will be renewed at higher rates in the coming months.

Our positions performed well. Wells Fargo, our second-largest position in the U.S., rose 45%. Block, our fifth-largest U.S. position specializing in digital payments, gained 30% since we increased our position this summer. We sold most of our Manulife shares, our third-largest Canadian position in early 2024, realizing significant gains.

Energy

This is the sector where we are most overweight compared to our benchmark (14% vs. 10%). Although undervalued, it generates enormous profits. We also use it as a hedge against geopolitical risks and inflation.
Our top three positions—CNQ, Suncor, and Enbridge—benefit from new pipeline openings and strong demand for Canadian heavy oil. Their stocks rose by an average of over 20% in 2024, despite falling oil prices. These companies redistribute most of their profits to shareholders, with no other sector matching their 6.6% payout rate.
We believe the new U.S. administration will impose more sanctions on Russian and Iranian oil exports, partially explaining the recent 15% increase in oil prices.

Finally, we increased our exposure to natural gas. In the U.S., 40% of electricity production depends on natural gas, and demand is expected to rise significantly in the coming years due to electric vehicles and artificial intelligence. Natural gas prices have doubled in the past four months. We initiated a position in Tourmaline, a Canadian natural gas producer with highly competitive costs and strong growth.

Materials

We hold 7% of our equities in this sector, which aligns with the weight of the index. All our positions are based in Canada. Nutrien, in the agriculture sector, remains our largest holding in the country, despite the stock declining by 11% in 2024. However, long-term prospects remain positive. We increased our stake this summer, and the stock has started to perform better recently. We also hold positions in gold, which have performed very well. Agnico-Eagle, our sixth-largest position in Canada, has surged by 80% since it was added in January.

Industrials

We hold 14% of our equities in this sector, 2% more than the index. Three stocks performed well: Element Fleet, CAE, and Air Canada. Element Fleet, which manages and finances corporate vehicle fleets, rose by 26% and is trading at $29. Since acquiring it at $11 during the pandemic, it has consistently delivered solid results year after year. CAE and Air Canada, after a challenging start to the year, rebounded in the fourth quarter due to strong earnings.
Other major holdings, such as Uber, CP, and Boeing, disappointed despite a strong start to the year. We took profits on CP early in the year, prior to a 10% drop in the stock price. Conversely, we increased our positions in Uber and Boeing later in the year. We remain confident in the business models of these companies and find their valuations attractive.

Consumer Discretionary

At the beginning of the year, we had limited exposure to this sector, which had been heavily overweighted during the post-pandemic recovery. This decision proved to be wise. Over 2024, we purchased additional stocks and ended with a 7% exposure, in line with the index. Our investments are focused on auto parts and hospitality companies, which are highly profitable.

Consumer Staples

We hold 7% of our equities in this sector, down from 9% at the beginning of the year, while the index sits at 5%. Our main positions remain Costco, Alimentation Couche-Tard, and Metro, which posted gains of 39%, 3%, and 33%, respectively. Couche-Tard was impacted by declining fuel prices. We took profits in both Couche-Tard and Costco, as we considered their valuations too high in the short term. Nevertheless, we have held these stocks for several years and remain confident in their long-term business models.

Healthcare

We hold 8% of our equities in this sector, the majority in our global value model. This sector comprises stable companies generating significant cash flows. Healthcare underperformed in 2024 due to the U.S. elections. Two of our three largest positions, Bristol-Myers and Gilead, performed well, driven by the discovery of new medications for schizophrenia and hepatitis C. Our other major holding, GSK, declined by 4% during the year. We took profits in May at $44, but the stock ended the year at $33, impacted by the appointment of a U.S. Health Secretary who opposes vaccines. Despite this, we remain confident in GSK's long-term potential.

Technology

The sector saw strong growth in 2024 for the second consecutive year, fueled by enthusiasm surrounding artificial intelligence. Even though we had not anticipated this rise and remain underweighted in the sector relative to our index (14% versus 18%), it contributed positively to our performance. The companies we own operate primarily in semiconductors and software and are closely linked to artificial intelligence. They are not among the world's 10 largest companies that are widely held.

Salesforce, our largest position outside Canada, rose by 28% in 2024, following a 98% surge in 2023. The stock began the year at $263. We sold some at $310 in March, then bought back at $236 three months later following a disappointing quarter. The stock closed the year at $334.
Marvell Tech, our second-largest position, soared by 83%. We first purchased the stock in 2020 when it was a leader in 5G. Since then, it has become one of the top-performing companies in artificial intelligence. Its expertise has enabled it to secure long-term contracts with major industry buyers, offering customized architectures. The last time we added to our position was in March 2023. However, with the stock now trading at over 15 times sales, our investment philosophy prevents us from acquiring more under these conditions.

Communications

This was the only sector to post negative results in 2024 (-12%). The decline was driven by increased competition, an expected reduction in immigration, and the depreciation of the Canadian dollar. We took advantage of this weakness to increase our exposure, raising it from 4% to 6%, compared to the index at 5%. We hold Telus, which we value for its position as a global leader in the Internet of Things. We also added Rogers during the year, as the stock had dropped nearly 50% over two years. We believe these companies, which pay solid dividends, have strong recovery potential, and should adopt more disciplined management practices in the future.