As investors we know that risk and uncertainty are part of the equation when investing in the great businesses that make up our financial markets. If not for risk and uncertainty, the best we could hope for is the risk-free rate of return from a guaranteed investment certificate (GIC) or a treasury bill (T-bill), which is about 3% per year these days. Conversely, a globally-diversified portfolio of equities has historically generated a return of approximately 9% per year. Nevertheless, the noise level through the first two months of this year has admittedly felt as though risk and uncertainty is higher than normal. The threat of tariffs, a surprise development in artificial intelligence, higher U.S. inflation, and a major shift in U.S. policy with respect to the war in Ukraine, among other things, are just a few of the challenges that investors have faced this year. In spite of these concerns, global equity markets have been resilient and are higher on a year-to-date basis so far in 2025. Moreover, government bond yields are close to the levels they were at to start the year. And, the beleaguered Canadian dollar, has shown signs of life of late as it has strengthened recently.

Tariffs continue to be on everybody’s mind. Despite many threats, the U.S. government has undertaken one action so far: an additional 10% tax on Chinese imports (the U.S. had pre-existing tariffs on Chinese goods). Yet, the risk of new tariffs remains: the U.S. is expected to revisit its plans for Mexico and Canada in early March, it is planning tariffs on all steel and aluminium imports later next month, and it seems tempted to bring Europe into its crosshairs in the not-too-distant future. But, markets have thus far taken the view that the worst-case scenario has already been avoided: wide ranging tariffs that were expected to be enacted over a month ago. Instead, delays, extensions, more targeted tariffs, and exceptions have emerged as the strategy so far. Should this persist, the approach seems consistent with what was experienced during President Trump’s first term in office.

On the artificial intelligence front, a Chinese company, DeepSeek, unveiled an AI model that demonstrated impressive performance relative to leading models developed in the U.S. It quickly surpassed OpenAI’s ChaptGPT as the most downloaded application on Apple’s App Store. The company suggested it was able to develop its AI model at a fraction of the cost of U.S. models. Moreover, it succeeded despite significant constraints as the U.S. government had restricted its ability (given it is a Chinese company) to access some of the world’s most powerful chips. It served as a reminder that innovation is alive and well in China. It also raised more questions around the significant amounts of capital that continue to get deployed by U.S. technology firms. That led to some volatility in the tech space. Given the elevated valuations of tech stocks that reflect high expectations, and the level of concentration of the tech sector within the U.S. financial market, we expect developments in AI to remain very important for the U.S. market.

Another challenge investors had to grapple with recently was the U.S. inflation reading for the month of January. It was higher than expected and the breadth of inflationary pressures also widened, suggesting a broader range of goods and services are experiencing some pricing pressures. While it’s just one month worth of data, investors will undoubtedly be watching to see if these pressures persist over the months to come. These views were shared by members of the U.S. Federal Reserve who suggested they are reluctant to lower interest rates any more until further progress on inflation is made.

Global equities have performed well despite these headlines. It suggests markets are looking past the noise and continue to have confidence in the earnings growth potential over the next few years. However, we don’t think investors should be complacent in the wake of the market’s resilience. We continue to watch for additional signs that corroborate the market’s strength. One such indicator is rising market breadth, which would suggest that an increasing number of stocks are making new highs. Should this occur, it would help confirm that the bull market for stocks continues to be on solid footing.