Highlights

• Despite all of the headline risks coming in to 2024, the market climbed a wall of worry with a strong year for North American equities and most bond markets
• Economic growth for 2025 is expected to be led by a strong U.S. economy – and in large part, influenced by stimulative policies related to corporate tax cuts, deregulation and trade protectionism. Execution and implementation risks remain as to whether the U.S. Republican party can deliver as promised
• We have summarized our key investment themes for the year ahead, across the range of asset classes we manage including alternative and private market investments. With interest rates expected to decline and a pro-growth U.S. economic growth agenda, constructing portfolios with alternatives should serve investors well
• Lastly, we have highlighted three potential risks that we are actively monitoring: An unexpected interest rate shock, global trade war, and heightened geopolitical tension – all of which could have unintended consequences to financial markets and disrupt what consensus believes should be an otherwise expansive year for the economy

2024: Year-in-Review

A common market truism goes: “Bull markets climb a wall of worry; bear markets slide down a river of hope”. Simply put, most bull markets are accompanied by a coterie of naysayers. Often, skeptics (bears) have a reasonable thesis as to why a positive trend in market performance should (or could) come to an end – in these environments, a bull market that continues to trend higher is said to “climb the wall of worry”. Despite broadly bearish investor sentiment to begin the year, 2024 was a strong year with both equities and fixed income markets delivering positive results. Although much of this negative sentiment was warranted due to various headwinds; we saw corporate executives, policy makers, and investors manage through a challenging backdrop to deliver strong results.

The “wall of worry” in 2024 was built on uncertainty around inflation, consumer resilience, central bank interest rate policy, geopolitical tensions, equity market valuations, and the overall health of major global economies. The outlook for global central bank interest rate policy was of particular concern for investors heading into 2024. Investors, especially in the first half of the year, were laser focused on inflation control – while central bankers utilized policy interest rates as their main lever to influence economic activity in an effort to moderate inflation. The year began with policy rates in most major economies at their highest levels since the great financial crisis. Global investors anxiously awaited guidance from central bank policy makers towards the commencement of an interest rate easing cycle and its progression throughout the year (and beyond). In the United States for example, policy rates increased from 0.25% to 5.0% between March 2022 and July 2023. With headline inflation easing, the U.S. Federal Reserve has now reduced target policy rates by a total of 1%, which included their first cut of this cycle of 0.5% in September. In similar fashion, most major global central banks have also begun to provide accommodation with lower rates – and have indicated further interest rate cuts into 2025.

The U.S. economy navigated a sharp increase in policy rates surprisingly well – with a soft or no landing scenario being the current consensus outcome. A soft landing is defined as a cyclical slowdown in economic growth that ends without a period of outright recession, while a no landing scenario is a result of continued economic growth alongside interest rate relief. Although the final outcome remains to be seen, it appears that Jerome Powell and the U.S. Federal Reserve have done an effective job of managing interest rate policy without a significant broad-based contraction of economic growth. Sufficient consumer spending has meaningfully helped support corporate earnings and healthy balance sheets, which in-turn positively influenced sentiment across both equity and debt markets. Corporate executives managed through a challenging interest rate environment quite effectively, strategically locking in low borrowing costs when interest rates were lower, announcing stock buybacks, and achieving sufficient earnings growth, all of which inspired investor confidence leading to multiple expansion. Moving forward, investors will look for these factors to be sustained in order to justify current valuations.

Despite the strong year and largely positive outlook for the U.S., it would be unprecedented to experience strong economic and market conditions across all global asset classes and geographies at the same time. 2024 did not set a new precedent in this regard – and as the saying goes, there is no beauty without pain. Fueled by weaker growth, the Eurozone struggled in 2024 as inflation weighed on consumers, and geopolitical tensions and political turmoil have had more of an impact across Europe. Germany was a big disappointment with expectations that Germany will experience a contraction in growth in 2024. Weaker economic conditions allowed the European Central Bank to cut interest rates earlier and faster than the U.S. – a sequence that has not occurred before. A similar story played out in Canada – where weak productivity and a challenged economy has proven to be more interest rate sensitive than the U.S., resulting in more rapid and pronounced interest rate cuts. China’s economic growth has been slowing and they haven’t seen the same level of recovery coming out of the pandemic as other major economies. The world is eagerly awaiting a significant stimulus package from the Chinese government and absent this highly anticipated liquidity injection, it will be difficult for China to achieve their economic growth target of 5% for 2025.

With 2024 now at a close, we have summarized our key investment themes along with economic and political developments we are monitoring as we look forward to 2025.

 

2025: Key Themes and Outlook

1. Macroeconomic Environment - Diverging policies and economies between the U.S. and other developed markets (including Canada)

• With a U.S. Republican government that will be focused on trade protectionism, we expect deglobalization to accelerate in 2025 with trade barriers and companies looking to localize their supply chains. As such, economic growth will remain imbalanced, with strength in the U.S. causing economic weakness for other major countries.
• Global central banks are cutting rates, including the European Central Bank, the Bank of England and the Bank of Canada. The U.S. is reducing interest rates but at a slower pace and on a more measured basis as it has been more challenging to get inflation rates to target level.
• U.S. Fed Chair, Jerome Powell, signaled at the central bank’s December policy meeting that further rate cuts will likely be slower and more targeted. His outlook on inflation is now higher, due to policy uncertainty and recent stickier inflation readings.
• This renewed interest rate policy divergence reinforces U.S. Dollar strength. Not to mention, the U.S. economy is growing at a materially faster clip than many developed market peers.
• Canada appears to be caught in the crosshairs of tariffs, as Trump announced in November. If introduced, this could result in an even slower economic growth profile for Canada and further weakness in the Canadian Dollar (relative to the U.S. Dollar).
• Canada has experienced a dramatic slowdown in productivity relative to the U.S. over the past couple of decades, which has constrained its relative growth. A loose immigration policy since COVID is the only reason why Canada has experienced any growth (albeit modest on a relative basis to the U.S.), as Canada’s per-capita Real GDP has declined for six successive quarters. More moderate immigration will be a headwind for the Canadian economy.
• Meanwhile, the European economy is struggling to keep up with the U.S. and China in terms of annual economic growth rates. Decades of low productivity and a reliance on traditional industries have come home to roost. Germany is experiencing a major slowdown in growth, as China has now become its competitor rather than its consumer.
• China remains an economic concern with deflationary pressures and a slowing level of growth. Expectations are high for another round of stimulus, which we believe is warranted – particularly if global trade barriers become a reality under the Trump administration.

Key Takeaways:

With the implementation of the incoming U.S. Republican government’s policies uncertain in terms of both timing and magnitude, we anticipate increased volatility across equity markets, bond yields and currency markets. We expect higher growth in the U.S. relative to other developed markets, and we will carefully monitor any resurgence of inflation as a result.

 

2. U.S. Equities – U.S. exceptionalism to continue with new administration

• Markets rallied to new highs post the election victory of Donald Trump on hopes that his business-friendly policies will benefit companies and their future earnings prospects.
• We are cognizant that elevated equity valuations and earning expectations leave markets with little room to absorb any negative macro surprises. However, we expect that the combination of an expanding economy and earnings growth delivery can provide further support to U.S. equities over the near-term.
• Consensus earnings estimates for 2025 are forecasted at roughly $272 for the S&P 500 Index, implying year-over-year earnings growth of approximately 12%. The market has been broadening out beyond the high-profile large technology names, with the expectation that more of the market’s 2025 earnings growth comes from a range of sectors, and a smaller concentration to the Magnificent 7 companies.
• U.S. mid-cap companies look intriguing due to more attractive valuations (15.8x Fwd P/E) and focused exposure to the U.S. economy. Tailwinds include easier monetary policy with lower interest rates, new pro-growth policies from the Trump administration, and secular themes (i.e. U.S. reshoring and tariffs). Lastly, many U.S. mid-cap companies have similar high growth potential of small-caps but tend to be less volatile.
• We expect the markets will be in a transitionary phase in the first few months of 2025 as investors attempt to ascertain where the new administration’s priorities lie and whether they are able to execute and implement, as they have announced.

Key Takeaways:

We expect a further broadening out of the U.S. market beyond select names in the large-cap technology space. We continue to view U.S. mid-cap companies as attractively valued and believe they will benefit under Trump’s economic promises. The first chart below shows valuations of both U.S. large-cap and U.S. mid-cap companies over the last 20 years, highlighting the relative attractiveness of U.S. mid-cap securities. The second chart shows expected earnings growth in 2025 and 2026 for the Magnificent 7 stocks (Apple, Alphabet, Amazon, Meta Platforms, Microsoft, NVIDIA, and Tesla) and the rest of the S&P 500 market (S&P 493). As illustrated by the chart, future earnings growth is expected to converge, indicating a potential change in market leadership.

Source: Ascendant Wealth Partners, FactSet.

Data is presented from December 31^st, 2004 – December 31^st, 2024.

“Large Cap U.S. Equities” represents the S&P500 Index, “Mid Cap U.S. Equities” represents the S&P400 Mid Cap Index.

 

Source: Ascendant Wealth Partners, RBC GAM, Bloomberg.

Expected earnings per share growth for 2024, 2025, and 2026. S&P 493 excludes Magnificent 7.

Presented as of November 22, 2024.

 

 

3. Canadian Equities – Weaker fundamentals, path will be bumpy

• Canadian equities performed well in 2024 and were supported by a decline in short-term interest rates. Although the rally saw broad participation with 10 of the 11 main industry sectors within the S&P/TSX index posting double-digit returns, leadership was observed in Information Technology, Financials and Resources (Energy & Materials sectors). Communication Services materially underperformed and detracted value throughout 2024.
• Despite a whirlwind of macro negativity that dominated headlines for most of the year, Canadian equities reacted positively to a dovish shift in monetary policy in 2024, with the S&P/TSX TR Index outperforming the U.S. S&P 500 for long stretches in the back half of 2024.
• Canada has experienced a dramatic slowdown in productivity relative to the U.S. over the past couple of decades, which has constrained its relative growth.
• The recently announced reductions in immigration targets, while potentially helpful in rebalancing the housing market, could subtract nearly one percentage point in total from Canadian GDP forecasts over the next three years, according to RBC Economics.
• It could be argued that Canada requires more interest rate cuts than the U.S. from current levels to achieve an improvement in economic growth improvement.
• On balance, in 2025 we believe the Canadian equity market will be supported by a reversal in negative sentiment with a federal election likely sooner than expected, improving earnings growth expectations and a valuation level that is attractive, particularly compared to the U.S. equity market.

Key Takeaways:

It is important to separate economic realities from the performance expectations of the stock market. Firstly, equity markets are leading indicators and therefore markets are forecasting where the economy is heading in 12 to 24 months, whereas economic growth readings tend to be lagging economic indicators. Secondly and most importantly in the case of the S&P/TSX index, the composition of the stock market differs materially to the industry make-up of the economy through the Gross Domestic Product (GDP). For example, the largest sector in the S&P/TSX index, Financials, constitutes approximately 33% of the index. In contrast, Finance and Insurance accounted for only 7% of Canadian GDP in 2023. Another clear example can be seen in the Real Estate sector – which accounts for only 2% of the overall S&P/TSX index, but contributed over 13% to the composition of Canada’s GDP in 2023 (Real estate and rental and leasing). Another important consideration relates to the composition of foreign and domestic revenues. Many of Canada’s great companies are global in nature and have revenue streams outside of Canada (and specifically in the U.S. – which will benefit if U.S. growth continues to outperform, and is a positive translation given the depressed loonie). Lastly, we believe that a change in government could be a positive catalyst for Canada.

 

4. International Equities —A more challenging picture with no clear catalyst in sight

• With stagnant growth in Europe and emerging markets expected to face headwinds from Trump’s economic agenda, capital flows into this part of the world appear to be limited.
• A wobbly growth outlook suggests the European Central Bank will continue to cut interest rates to support the economy – even with a core inflation rate that is higher than target.
• As a reminder, European (excluding the U.K.) equities represent the largest weighting in the international developed market, MSCI EAFE Index, at 46.2%.
• On the corporate earnings front, the MSCI EAFE index is projected to record low-to-mid single digit earnings growth in 2025 – again compared to mid-teens earnings growth in the U.S.
• With macro indicators continuing to flag elevated downside risks for non-U.S. developed economies, we believe an overweight position to Canadian and U.S. equities is appropriate.
• One area of preference is Japanese stocks over the intermediate term as two important structural changes are occurring. The deflationary environment of the past 30 years is behind Japan, which is good for economic and earnings growth. Regulatory changes to enhance capital markets' transparency and to expand investment options will likely improve shareholder returns and the attractiveness of investing for individual investors.

Key Takeaways:

International equity markets continue to trade at a steep discount relative to the U.S. equity market and this discount has only widened over the last couple of years (the MSCI EAFE Index trades at a forward multiple of 14.8x relative to the U.S. S&P 500 forward multiple of 21.6x. As the charts below show, we strongly believe the U.S. premium valuation is warranted relative to the rest of the world as not only has there been better performance of U.S. markets, the U.S. market has also realized materially higher earnings growth over the course of the last 15 years.

 

 

Source: Ascendant Wealth Partners, YCharts, Bloomberg.

Performance and Earnings for the U.S. equity market are those of the MSCI USA Total Return Index.

Performance and Earnings for the Rest of the World are those of the MSCI ACWI Ex USA Total Return Index.

 

 

5. Corporate Credit – Be selective as strong credit fundamentals are reflected in credit spreads

• With the sharp decline in short-term interest rates over the course of the last few quarters, we have been positioning our portfolios with a cautious view towards duration exposure, while allowing us to remain tactical as government yields move in a wide range. There has been a lack of term premium as the yield curve is relatively flat.
• Government bond yields in Canada are less attractive than a year ago as recent and anticipated interest rate cuts have been largely priced in. More attractive yields are available in U.S. Treasuries and U.S. corporate bonds. However, the RBC Economics team anticipates more easing in Canada than what is priced in, and fewer rate cuts in the U.S. than investors expect – all to say, there could be a tailwind to Canadian bonds if economic growth in Canada remains tepid, not to mention the interest rate differentials will continue to favour a weaker Canadian Dollar if all of this materializes.
• With the U.S. economy expected to be the strongest developed economy again in 2025 in terms of growth, we don’t foresee any material uptick in corporate defaults or restructurings. Corporations have effectively termed out their balance sheet after the pandemic when interest rates were at historic lows.
• Default rates have moderated year-to-date although signs of stress have been evident elsewhere in the credit market. This poses more of an indirect risk to investment grade names given the strong credit fundamentals of high-quality issuers.
• With credit spreads relatively tight from a historical perspective, the prospects for incremental and excess returns coming from spread tightening looks limited. That said, credit spreads can remain narrow for extended periods, barring an economic shock.
• Despite relatively low compensation for credit risk, we continue to view certain pockets of investment grade corporate credit as having a good risk and return profile.
• Against this background, positive interest rate carry is still a focus in our investment decisions.  Our focus is largely on U.S. credit, through high yield bonds and senior secured bank loans, including private credit strategies given the higher base rates in the U.S. market. We are also looking to absolute return credit strategies where an active mandate could generate higher returns.

Key Takeaways:

With lower interest rates, we have been reducing traditional bond exposure for other higher potential return opportunities such as alternative or private market investments. Bonds continue to offer a good degree of safety in the portfolio and as the chart below illustrates, U.S. bond yields remain elevated relative to the last 20 years, even with a tighter credit spread backdrop. Canadian bond yields aren’t nearly as attractive, as Canadian policy rates have materially adjusted lower given weaker economic activity.

 

 

Source: Ascendant Wealth Partners, Bloomberg.

The following indices are used to represent the U.S. Fixed Income Market - U.S. Government Bonds: Bloomberg U.S. Treasury Bond Index; U.S. Corporate Bonds: Bloomberg U.S. Corporate Bond Index; U.S. High Yield Bonds: Bloomberg U.S. High Yield 1-5Y Bond Index.

 

 

6. Alternatives – Enticing risk and return opportunities beyond traditional investments

• Select private strategies that offer an enhanced return profile over public equity and credit markets and an illiquidity premium, may be appropriate for investors that can take more of a long-term view – this includes both private equity and private credit investments.
• With interest rates having declined over the course of the last few quarters, we have been introducing alternatives for a portion of the high quality corporate and Government bond allocation of the portfolio, with the objective of generating a higher yield. High yield bonds and senior secured loans (including private credit) have been in high demand given the income enhancements that are available.
• In addition, for strictly Canadian Dollar based credit exposure, we expect to introduce absolute return credit strategies in 2025 that exploit credit spread mispricing and minimize interest rate risk.
• Similar to senior bank loans, the majority of private credit lending is in the form of floating-rate investments that change as central bank policy rates change, providing real-time interest rate mitigation compared to investments like fixed-rate bonds.
• We expect a substantial increase in mergers and acquisitions (M&A) activity in 2025 driven by Trump’s policy changes to deregulation and corporate taxes, as well as continued robust growth in the U.S. An upswing in M&A activity could provide a tailwind to private equity as well as the private credit investors that provide debt capital to finance these transactions.
• As we anticipate a broadening out in the market in terms of greater participation, this level of dispersion should lead to an expansive opportunity set for long/short equity investors such as hedge funds. The objective of long/short equity hedge funds is to reduce the level of market risk while capitalizing on idiosyncratic opportunities at the company-by-company level from carefully assessed investment research.

Key Takeaways:

Incorporating alternative and private market investments in a well-constructed portfolio provides uncorrelated return outcomes and a level of diversity that goes beyond a traditional stock and bond portfolio. With the interest rate environment expected to be more accommodative with further interest rate cuts and public market valuations that have only moved higher over the last year, we expect to increase the alternative weighting in our portfolios in 2025.

 

Non-Market Risks and Considerations

With a new and outspoken Government administration in the U.S. coming into power in early 2025, there is no question that there is some implementation risk when it comes to executive orders being signed or policies going through the legislative channel, and whether they fully align with what was campaigned on and promised. There are a few non-market related risks that we are closely monitoring that could develop as it relates to the Republican’s more protectionist and America First agenda:

 

      i) Inflation Shock

Trump’s pro-growth mandate could lead to unintended consequences and a potential resurgence of inflation in the U.S. We have seen bond yields increase at the mid and long points of the curve since the U.S. Federal Reserve started to cut interest rates in September, which is an atypical response. Corporate tax cuts could yield even higher U.S. deficits and a strong anti-immigration policy would likely add further stress to wages given today’s already tight labour market – both of which could reignite inflation. Should inflation reemerge, the U.S. Federal Reserve could take a slower and more calculated approach to further stimulative interest rate cuts. As we experienced in 2022, most major asset classes are sensitive to rising interest rates that are not anticipated and this requires careful attention in the coming year. We continue to focus on shorter-dated maturities within our fixed income exposure which helps provide better protection in the event inflationary pressures return.

 

      ii) Global Trade War

Even dating back to his first presidency, Trump strongly believes that China has been taking advantage of the U.S., leading to the gutting of U.S. manufacturing which has sought out cheaper labour and lower cost materials in Asia. In addition to the imposition of tariffs on China, Trump had also announced tariffs on imported steel and aluminum which led to Canada introducing select retaliatory tariffs on the U.S. back in 2018. While Canada, Mexico and the U.S. have an existing trilateral trade agreement named USMCA (“NAFTA 2.0”) which came into force in 2020, Trump announced at the end of November that he will look to introduce a 25% across-the-board tariff on Canada and Mexico. We view this proposition as unlikely given the trade agreement which does not come up for review until 2026. We believe this is simply a negotiating tactic as Trump is clearly unhappy about the Canadian and Mexican border controls. Crude oil imports from Canada are simply too significant for the U.S. as Canada supplies more than 50% of all U.S. crude oil imports. Energy also happens to be the largest Canadian export to the U.S. with more than $170 Billion (CAD) exported stateside over the last 12 months, accounting for approximately one-third of all Canadian exports to the U.S. A global trade war remains a risk and tariffs could prove to be inflationary and at the same time, nations will look to preserve their interconnectedness with global trade and look to protect their local currencies.

 

      iii) Geopolitical Risks

Geopolitical tensions have proven to result in short-term “risk-off” shocks for the market. There are current wars in Ukraine and in the Middle East and any intensification could bring more uncertainty to financial markets, with past events resulting in higher commodity prices and an even stronger U.S. Dollar. While geopolitical risk is very difficult to predict or forecast, after a year which saw widespread political disruption with more than 60 countries going to the polls, any level of political change could have a temporary impact on financial markets.

 

Conclusion

Strong performance in 2024 and a positive outlook for 2025 emphasizes the importance of remaining invested. A simple, yet important foundational concept that supports the preservation and long-term growth of capital. This investing principle can be particularly challenging to follow when asset prices feel inflated or expensive from a historical relative valuation perspective. Currently, many assets are priced at or near all-time highs. Elevated asset pricing and valuations may prompt investors to pause and question whether now is a good time to buy (or hold current assets). Contrary to our natural tendency to avoid future price volatility, all-time highs are often a bullish indicator. This is the result of a simple economic supply and demand dynamic, as follows: when capital flows to a particular asset exceed capital flight out of that same asset, prices rise - and if this trend continues, prices will continue to increase.

The below chart illustrates the historical average performance of the U.S. stock market based on money invested on any day versus money invested at a new market high:

Source: Ascendant Wealth Partners, J.P. Morgan Asset Management. Data presented from January 1^st, 1988 to December 31^st, 2023.

 

Surprisingly, with the exception of very short-term returns, on average, capital invested at new highs outperforms capital invested on any day. This history suggests that investing at all-time highs is not a bad strategy because new highs are typically clustered together and it is common for the market  to experience multiple records in a single year (in 2024, the S&P 500 has made a new record high in 57 of its trading days). In other words, market strength begets more market strength. Now, this is not to say that investors should ignore other fundamental investment principles such as appropriate diversification (across asset classes, geographies, styles, uncorrelated assets, etc.) – but it does further emphasize the importance of remaining invested – even when faced with a wall of worry. Extending the quote to start this piece about the wall of worry, it is also said that “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria”. We have reviewed a number of 2025 outlooks from the large global investment banks and by and large, most are optimistic for this year. We don’t believe we are yet in a period of euphoria and there is a lot of excitement about artificial intelligence and related technology, viewed as the largest technological revolution since the application of the internet, where we think a larger subset of companies start to benefit as they adopt AI in their business. However, with valuations extended, we are cautiously optimistic – and for those that can accept a component of their portfolio that is less liquid, we think introducing more alternative and private market investments to the portfolio in 2025 will serve investors well.

We thank you for your continued confidence and support and wish you and your families a very happy, healthy and prosperous 2025.