I write this market update and outlook with the intention of hopefully answering the recurring question of “how will the new governing bodies in Canada and USA influence your portfolio?” In times like these, we need to keep in mind that corporate earnings drive stock prices, not which government is in power. Governments will create a framework under which they will operate and within that framework there will be investment opportunities.

Central banks have successfully guided inflation lower while avoiding a severe economic slowdown. In most developed economies central banks are easing monetary policy by reducing interest rates. Recently however, given continued strong economic data, the market has shifted its outlook for future interest rate reductions in the US. Markets now anticipate the U.S. Federal Reserve will trim by only 50 basis points in 2025, this is in stark contrast to the 125-bps priced in as recently as September. The Bank of Canada lowered its policy rate by another 50 bps in December but indicated a more gradual approach going forward. Recent stronger than expected GDP, jobs, and inflation data has caused the market to reduce rate cut expectations, it is currently estimated that only 1.5 of rate cuts are priced in for 2025.

Bloomberg consensus forecasts show the world economy is expected to expand by 3% y/y in 2025 on a real GDP basis, in line with the 3.1% pace in 2024. Global inflation is forecasted to be 3.5%–4%. Taken together this should foster a decent revenue growth environment of 6%–7% for the corporate sector, according to Bloomberg consensus estimates.

Renewed trade frictions are a key macro risk, particularly in terms of their potential to disrupt the broader economy, fuel inflation, and elevate interest rate volatility. All eyes are on the incoming U.S. administration as we await more details on the policy agenda, particularly on tariffs, taxes, deregulation, and immigration. The completion of the U.S. election removed a lot of uncertainty, but a unified Republican government has widened the range of economic outcomes to be considered.

As we enter 2025, the global economic expansion appears to be on steady footing, marked by moderate growth, disinflation, and a shift towards easing financial conditions. While this environment should be supportive to corporate earnings growth, we believe current equity valuations have factored in these optimistic expectations. The MSCI All Country World Index now trades at a multiple above its long-term average, 18.1x forward 12-month vs 15x over the longer term. Given equity valuations currently sit at elevated levels relative to history, return expectations may increasingly depend on earnings growth rather than further valuation expansion.

The U.S. dollar continues to push to multi-year highs and is now up ~9% from its recent low. Much of the currency’s increase can be attributed to expected rate cuts, the implementation of tariffs, and growth-friendly Trump policies.

Canada is making efforts to improve border security, which has been cited as the impetus for the Trump tariff threats and discussions of retaliatory tariffs are already in the works. U.S. import tariffs would, in isolation, boost the U.S. dollar and act as a shock absorber against domestic price increases. However, that dynamic is likely to be less pronounced if other countries retaliate with tariffs of their own, reducing demand for U.S. goods and U.S. dollars.

As we move through this part of the cycle, I will continue to rely on our established investment process, one that has successfully guided us through all parts of the economic, interest rate and election cycles. I will continue to monitor for underpriced securities in sectors where we see growth going forward.

 

Beth

Beth Arseneau, FMA, CIM
Portfolio Manager

416-960-4592
beth.arseneau@rbc.com