Market environment

Markets have been highly volatile since the beginning of 2025. After a sharp decline and widespread panic through early April, equities staged a strong rebound and are now posting positive year-to-date returns. This turnaround can be explained by several factors. Roughly 75% of the North American economy is service based, less directly impacted by trade barriers. At the same time, the new U.S. tariffs have had only limited effects so far. Implementation has been repeatedly delayed, with numerous exemptions granted, and only about 22% of costs have been passed on to consumers, with businesses and foreign producers absorbing the rest. As we saw in 2020–2021, a wave of new retail investors has lifted some parts of the market far beyond what fundamentals would justify. In Canada, nearly half of this year’s gains come from gold producers, which now represent roughly 12% of the index. In the United States, almost all the advance since April has come from large AI-linked companies, including some with no earnings at all. The seven largest tech firms now trade at 32x earnings, up from 24x at the start of the year. The 50 largest U.S. companies account for 75% of the S&P 500’s market capitalization, double their share ten years ago, underscoring the extreme concentration. While institutional investors have been favouring gold and cash, retail investors have been pouring into AI-related equities.

Our performance

In this context, our portfolios have delivered results very close to their benchmarks, which we view as a strong outcome. From January to early April, while markets were falling sharply, we held up well thanks to prudent diversification. Between April and July, we participated less in the narrow, speculative rally led by a handful of technology stocks, but we did not change our approach. We continue to focus on high-quality companies and maintain broad diversification rather than chase momentum. In recent months we modestly increased our exposure to gold, but only through established companies with strong balance sheets and operations in reliable jurisdictions. This selectivity has paid off in recent weeks. Several of our holdings reported solid results, while a number of high-profile technology names declined. As a result, our portfolios outperformed their benchmarks in August, benefiting from a renewed investor focus on quality.

Outlook

Looking ahead, we believe caution is warranted. A number of economic signals point to heightened risk.

In Canada, GDP growth has turned negative. Exports are feeling the impact of trade tensions, and the housing market is slowing. Consumers have continued to spend, supported by pandemic-era savings and government spending fueled by large deficits, but that cushion is eroding. The household savings rate has fallen below 6%, close to pre-pandemic levels, and unemployment has climbed to nearly 7%, its highest in close to a decade. The situation could deteriorate further if conditions continue to worsen.

In the United States, the picture is different. Overall growth remains strong, but consumers are showing signs of weakening. In real terms, consumer spending grew only about 0.4% in the first half, its slowest pace since the pandemic. High interest rates, budget cuts, and the initial effects of tariffs are beginning to be felt. Credit card delinquencies have surpassed 12%, the highest since 2008, and mortgage defaults are gradually rising. Artificial intelligence continues to provide a meaningful boost. Investment in AI is expected to add roughly 1.2% to GDP growth this year, a contribution rarely seen from a single industry over such a short period. By comparison, the tech bubble of the late 1990s added no more than 1% in a single year.

The U.S. president is pressing for lower interest rates, and markets are pricing in nearly five cuts over the next 18 months. Still, inflation remains close to 3%, despite the sharp drop in energy prices over the past year. Many analysts expect tariffs will be passed on largely to consumers, which could increase their impact by year-end. Unless the economy slows sharply, rapid rate cuts appear unlikely.

Valuations remain stretched, with U.S. equities trading around 24x earnings, well above long-term averages. We are facing a market driven by a small number of industries, while economic indicators appear increasingly fragile.

Investment strategy

In this environment, we are reinforcing our prudent, selective approach while taking advantage of compelling opportunities.

In Canada, our focus is on resilient companies with stable earnings and low volatility. These include entrenched oligopolies across key industries and natural resource producers that have become more efficient and disciplined. These companies are undervalued due to tariff concerns, but they have strong balance sheets, robust free cash flow and sustainable dividends. They are well positioned to weather a slowdown.

Outside Canada, we intend to increase our exposure to three powerful long-term themes: artificial intelligence, automation and autonomous vehicles. Rather than chase the most expensive and widely known names, we are targeting companies that are less visible but essential to these trends. This includes manufacturers of digital infrastructure equipment and components, providers of specialized software, and producers of critical commodities such as copper and natural gas. We are also looking at certain large companies in traditional sectors that stand to benefit indirectly from these shifts.

We are gradually tilting more toward international markets compared to the U.S. We expect the U.S. dollar to continue to weaken and view U.S. equities as expensive compared to international peers. U.S. tariffs particularly target China, yet China now has nearly ten times more industrial robots than the U.S. and invests almost as much in research and development. It has established a clear lead in electric vehicles and seeks to replicate this success in other strategic sectors. India, also under U.S. pressure, exports mainly services, which remain largely shielded from tariffs. We see opportunities in select international firms positioned to benefit from these structural trends, including some attractively priced Chinese technology companies.

Our strategy aims to protect your portfolios while ensuring meaningful participation in long-term growth drivers. The companies we hold are positioned to benefit from long lasting global trends while being less expensive and less risky than the market’s most popular names. We believe this will enhance returns relative to both volatility and risk.