The U.S. government shutdown is now behind us, removing a notable source of uncertainty in the markets. While the shutdown possibly factored into some short-term economic slowdown, history shows this ‘lost ground’ is typically regained soon after. There is cause for optimism, along with a strong earnings season that is bolstering equity market sentiment. We discuss these developments along with some thoughts on the Canadian federal budget in more detail in this economic update.
We are sharing the latest episode of #MacroMemo from RBC Global Asset Management – in this week’s video, Eric Lascelles (Managing Director & Chief Economist) digs into the concerns about potential bubbles in AI investments and some U.S. stocks, the anticipated impacts of the U.S. government shutdown, tariff updates, and more. We are also reminding you to grab your burger this November as part of the United Way’s Ultimate Burger Battle! More details are below.
Economic Update
U.S. Government Reopens
After more than 40 days, the longest federal government shutdown in U.S. history has officially ended, with President Donald Trump signing a bill to restore federal funding. From a market standpoint, we see two key implications.
First, the resolution helps remove a notable source of uncertainty that had, at times, weighed on investor sentiment and confidence in the economic outlook. Second, while the shutdown likely caused a short-term slowdown in economic activity, history shows the economy tends to make up lost ground once normal operations resume.
According to the Congressional Budget Office, a six-week closure could have reduced real GDP growth in the current quarter by about 1.5 percentage points, though much of that impact is expected to be reversed over the next few quarters. Bloomberg consensus forecasts still anticipate the U.S. economy to expand by around 2% in 2025, though momentum is expected to slow from 2.8% in Q3 to 1.1% in Q4 before gradually rebounding to 1.5% in Q1 2026 and 1.9% in Q2. It will take time for federal agencies to restart operations and clear data backlogs, but the reopening is a positive development—reducing near-term risks to the economy and improving visibility into economic trends.
Earnings vs. Valuation
As we approach the end of Q3 reporting season, corporate results have been broadly upbeat. Earnings beats across the S&P 500 have run above long-term averages, reinforcing the resilience of corporate profitability. However, the picture is somewhat more mixed within Big Tech and Artificial Intelligence (AI)-adjacent sectors, where volatility has picked up as investors seem to be assessing a compelling long-term AI growth opportunity against valuations that, in some cases, sit well above historical norms.
The encouraging news is that earnings continue to underpin the equity market’s strength. Global equities (MSCI All-Country World Index) are up roughly 20% in U.S. dollar terms year to date, with rising forward earnings estimates accounting for close to 60% of those gains, and valuation expansion making up the remaining balance. With most valuation metrics hovering near the upper end of their 10-year ranges, continued earnings delivery will be essential to supporting markets. More broadly, we think recent choppiness in AI-related sectors underscore how dependent certain parts of the market have become on sustained AI enthusiasm, reinforcing the importance of selectivity, valuation discipline, and diversification.
Canadian Federal Budget
Canada’s federal government released its first budget under Prime Minister Mark Carney last week. Against a backdrop of global trade frictions, geopolitical uncertainty, and persistent affordability and productivity challenges, the much-anticipated Budget 2025 built on campaign promises to balance an agenda of substantive investment with fiscal responsibility, featuring expansionary spending aimed at infrastructure, defense, housing and tariff-affected industries.
The fiscal plan is front-loaded: the projected $78 billion deficit for this year (-2.5% of GDP) is materially higher than previously forecast, but the government expects the deficit to decline to $57 billion by 2029–30 (-1.5% of GDP) as expenditure review and operational efficiency savings—including headcount reductions—take effect. While sizable, the deficit came in lower than some economists anticipated and has not sparked a notable bond market reaction. The minority Liberal government still needs parliamentary support from other parties to pass the budget, but broadly, Budget 2025 appears to strike a reasonable balance between strategic investment and fiscal prudence.
Summary
Although uncertainties around global trade and growth persist, we expect the end of the U.S. government shutdown to remove a key overhang. Earnings momentum remains a meaningful tailwind for equities, but we believe elevated valuations and the concentration of market leadership in AI-related sectors warrant ongoing attention. In Canada, implementation of Budget 2025’s capital-focused measures will play an important role in shaping the economic outlook into 2026. In our view, maintaining an “invested, but watchful” posture remains appropriate given the current mix of opportunity and risk.
#MacroMemo – Fizzy markets, bubbles, and more
In this latest episode of #MacroMemo, Eric Lascelles (Managing Director & Chief Economist, RBC Global Asset Management) dives into several timely and relevant topics: concerns about bubbles and ‘fizzy markets’ in different corners of the financial markets, unpacking the U.S. government shutdown impacts, tariff developments, as well as a few thematic topics including the ‘K-shaped’ economy and Chinese deflation.
You can watch the 15-minute episode by clicking the link here.
Ultimate Burger Battle - in support of the United Way Wellington Dufferin
There is still time to get your Ultimate Burger, in support of the United Way!
$2 of every Ultimate Burger sold in November goes towards the United Way and their fight against food insecurity in our community! Our team is proud to be presenting sponsors for this awesome initiative – not to mention, happy taste-testers for these delicious burgers. Don’t forget to grab yours!
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.