Financial markets advanced well beyond expectations over the past year. Despite a sharp pullback in March and April, triggered by trade tensions and U.S. tariff announcements, markets rebounded quickly and ended the year at significantly higher levels. This marks a third consecutive year of double- digit returns for global equity markets, a historically rare outcome.
Several factors explain this resilience. First, the actual economic impact of tariffs proved far more limited than markets initially feared. Implementation was partial, frequently delayed, and accompanied by numerous exemptions. A meaningful portion of the cost was absorbed by corporations rather than fully passed on to consumers. Second, economic growth surprised to the upside in both Canada and the United States, supported by pockets of ongoing strength and exceptionally high levels of investment in a few key sectors. Finally, central banks began an interest rate easing cycle, which supported financial conditions and asset valuations.
That said, this expansion has been far from broad-based. The vast majority of equity market performance has been driven by a very small number of engines. Three themes explain most of the gains: artificial intelligence, gold, and Canadian banks. This extreme concentration has been both a source of performance and a source of vulnerability. The ten largest U.S. companies now represent close to 42% of the S&P 500’s total market capitalization, compared with roughly 25% at the peak of the technology bubble in 2000. In addition, eight of the twenty largest U.S. companies are directly linked to artificial intelligence and together account for approximately 38% of the index.
Our performance and positioning
In this environment, our portfolios participated meaningfully in the market’s advance. This performance is particularly encouraging given that it was achieved with more diversified portfolios and fundamentally stronger companies than those driving most of the market’s gains.
Over full market cycles, our approach continues to demonstrate its value. Over the past five years, it has allowed us to outperform our benchmarks with lower volatility. We accept not capturing the most speculative phases of the market in exchange for better capital protection when conditions deteriorate. Within this framework, we have gradually increased our exposure to natural resources and international markets, while remaining highly selective within artificial intelligence, where we favor suppliers and less visible but essential companies rather than the most crowded names.
Interest rates and debt: Two very different realities
Interest rates remain a central element of the current environment, but their effects differ sharply between Canada and the United States due to the underlying structure of debt.
In Canada, debt is primarily held by households. A large portion of mortgages are either variable rate or subject to short renewal cycles, and a meaningful share of public debt also matures over relatively short horizons. As a result, changes in interest rates are transmitted more quickly to the real economy. Consumers, businesses, and governments benefit more directly from monetary easing, which provides support to the Canadian economy despite a pronounced slowdown in sectors such as housing, where prices remain roughly 20% below their 2022 peak.
In the United States, the situation is fundamentally different. Debt is concentrated at the federal government level. Nearly one-third of U.S. federal debt, approximately USD 9 trillion, will need to be refinanced over the next twelve months. Rate cuts therefore primarily benefit the U.S. government by lowering its borrowing costs.
For U.S. consumers, the effect is far more limited. Mortgages are predominantly fixed for thirty years. Most new U.S. mortgages in recent years have been issued at rates above 6%, while the very low-rate mortgages below 3% date back mainly to 2020–2021. Despite policy rate cuts, mortgage rates remain elevated, continuing to weigh on housing activity and home sales. Notably, long-term interest rates have risen even as short-term rates declined, a clear signal that markets remain concerned about inflation and fiscal deficits.
Valuations versus earnings
Since 2023, U.S. equity market gains have been driven far more by multiple expansion than by earnings growth. The S&P 500 price-to-earnings ratio has risen from roughly 16 times to nearly 24 times today. In other words, valuation expansion explains roughly three times more of the recent market advance than actual earnings growth.
This dynamic leaves markets more sensitive to economic disappointment, renewed inflation pressures, or slower profit growth.
An increasingly concentrated economy
Another defining feature of the current cycle is the growing concentration of economic and financial growth. A significant share of expansion is now driven by artificial intelligence, digital infrastructure investment, and consumption by higher income households. In the United States, approximately one third of total consumption comes from the top income decile.
By contrast, a growing portion of the population faces mounting pressure from higher living costs, rising debt burdens, and stagnating purchasing power. Credit card delinquency rates have exceeded 12%, a level not seen since the financial crisis. In 2025 alone, more than 1.3 million layoffs were announced in the U.S., the highest level since 2009 excluding the pandemic period. Consumer sentiment continues to deteriorate even as equity indices reach record highs.
This widening gap between financial markets and the real economy has historically made markets more fragile.
The three market engines: Opportunities and risks
Artificial intelligence remains a powerful long-term structural theme with genuine productivity potential. However, the current phase is extremely capital intensive. Investment levels are massive, highly concentrated, and increasingly financed through debt. In 2025 alone, large technology companies issued close to USD 200 billion of debt to fund AI related projects. History shows that major technological revolutions, such as telecommunications and the internet in the late 1990s or energy in the early 2010s, are often followed by periods of weaker investor returns after phases of overinvestment.
Over the long term, China appears to have built a significant lead in several components of artificial intelligence, particularly in robotics, electricity generation capacity, and infrastructure. China’s power generation capacity is now roughly 3 times that of the United States, and it plans to invest more than USD 560 billion in this area over the next five years. Its main structural disadvantage remains geography and access to certain strategic energy resources, particularly oil.
Gold continues to benefit from powerful structural tailwinds. Central bank demand remains strong, especially in emerging markets. In 2025, gold rose by more than 50% while global production increased by only about 2%. That said, rising prices have attracted growing interest in more speculative segments of the market. Our focus remains on high quality gold companies capable of generating durable cash flows and growing in a disciplined manner.
Canadian bank stocks also delivered strong gains. However, price appreciation has been roughly three times higher than earnings growth and has been driven primarily by more volatile capital markets revenues. Core banking profits are stagnating, and exposure to consumer credit and housing warrants a more cautious stance in our view. There are also growing risks associated with private credit. The size of this market now exceeds that of the 2007 subprime market and features increasing interconnectedness with the banking system, limited transparency, and a gradual migration of risk toward retail investors.
Canadian dollar, politics, and global uncertainty
We believe the Canadian dollar offers appreciation potential over the short to medium term. A narrowing interest rate differential with the United States, combined with a currency that remains undervalued based on purchasing power parity measures, provides meaningful support.
By contrast, the U.S. dollar faces longer term structural pressures stemming from deficits, the scale of federal debt, and gradually eroding monetary credibility. This further reinforces the case for increased international diversification.
Political uncertainty remains another major source of risk. Historically, the years leading up to U.S. presidential elections have been among the most volatile for markets, with average peak-to-trough corrections approaching 20%, often followed by rebounds averaging roughly 43% in subsequent months. In this context, we intend to remain cautious in the near term while fully recognizing that such periods often generate attractive investment opportunities during the year, as is frequently the case in mid-cycle phases.
These risks are compounded by ongoing geopolitical tensions, particularly between the United States and Russia, as well as uncertainty surrounding the future path of interest rates and inflation.
Strategy and outlook
Markets have risen significantly, valuations are elevated, and growth is increasingly concentrated. In this environment, discipline, patience, and selectivity are likely to be the primary drivers of risk-adjusted performance in the years ahead.
Our strategy remains focused on balancing long-term structural themes with more stable, attractively valued, and less volatile businesses. This approach is designed to protect portfolios during more challenging periods while maintaining exposure to durable growth drivers. We believe this discipline is more relevant than ever in the current phase of the cycle.