Despite resilient equity markets, headline-driven uncertainty persisted throughout the month of February, with tariffs and technology in focus. More recently, the tensions and military action in the Middle East is creating its own uncertainty and volatility (we will cover this in more detail in a future economic update as the impact of these actions become clearer).
In this economic update, we will be discussing the tariff and technology impacts alongside North American corporate earnings trends, and the implications for Canadian trade.
We are also sharing the latest episode of the 10-Minute Take from RBC Economics: in this episode, Claire Fan and Carrie Freestone break down the decision by the U.S. Supreme Court to strike down the use of the International Emergency Economic Powers Act (IEEPA) for the U.S. to impose broad-based tariffs. Specifically, they’ll explain why this decision was made, what the administration is expected to do now, and why Canada’s tariff backdrop hasn’t changed much since the ruling.
Economic Update
Solid Corporate Earnings
As the Q4 2025 earnings season for the S&P 500 draws to a close, the index has achieved its fifth consecutive quarter of double-digit earnings growth. However, the “beat rate”—the share of companies exceeding profit expectations—moderated. In an environment where valuations remain elevated, a narrower gap between reported results and forecasts could leave markets somewhat more sensitive to disappointments or adverse macro shocks.
Earnings results from some Big Tech firms were closely watched as a test of whether heightened AI-linked expectations can be maintained. Investors are increasingly looking for clear evidence that substantial AI investments are translating into tangible returns, amid questions around profit growth visibility and the potential for AI-driven disruption in certain industries. This skepticism was evident when a major AI infrastructure firm recently delivered a “beat and raise”—exceeding revenue forecasts and lifting forward guidance—was met with a subdued market response. Nevertheless, the Big Tech group, broadly speaking, remain supported by durable business models and reliable cash flow generation.
North of the border, Canadian firms are also wrapping up their 2025 reporting season, while major banks reported Q1 2026 results. Bank earnings have been positive, with record profits driven by solid performance across key divisions alongside improved return on equity (ROE). Despite trade and geopolitical uncertainty, consensus estimates for the S&P/TSX Composite Index continue to point toward double-digit earnings growth this year, underpinning a constructive outlook for Canadian equities.
More Tariff Developments
The U.S. Supreme Court recently struck down some tariffs imposed by the Trump administration under the International Emergency Economic Powers Act (IEEPA). The market reaction was largely muted as investors had anticipated both the ruling and efforts by the administration to reinstate tariffs through alternative legislations.
Accordingly, a 10% global tariff on U.S. imports came into effect earlier this week, with the White House indicating that could increase to 15% "where appropriate". Implemented under Section 122, these levies can remain in place for 150 days without Congressional approval. However, Section 122, designed to address balance-of-payments emergencies, is also likely to face legal challenges. Given the current composition of Congress, a vote to extend the tariffs appears unlikely, but the temporary measure provides time for the administration to restructure its tariff policy.
Other legislative pathways, such as Sections 232 and 301, require formal investigations into national security risks or unfair trade practices but tend to offer more durable legal grounding. Still, the Supreme Court’s ruling reaffirmed that presidential authority over tariffs is not unlimited, reinforcing constitutional checks and balances and underscoring that more permanent trade measures require a more rigorous procedural path.
For Canada, the immediate economic impact remains limited. Roughly 90% of Canadian exports to the U.S. continue to flow tariff-free under exemptions within the U.S.-Mexico-Canada Agreement (USMCA). Meanwhile, sectoral tariffs on metals, autos, and other targeted parts of the Canadian economy imposed under Section 232 remain in effect and continue to weigh heavily on certain industries. As such, the scheduled USMCA review in July remains more consequential for Canada’s economic outlook, alongside ongoing efforts to diversify trade and invest in domestic capacity.
Our base case remains that the core agreement framework stays intact, given deeply integrated North American supply chains and the shared economic costs of disruption. That said, we expect negotiations to involve political signaling and sector-specific pressure points that could stoke near-term uncertainty. We are monitoring developments on this front closely.
Summary
While markets remain susceptible to shifts in sentiment given elevated valuations and policy uncertainty, strong corporate earnings momentum provides grounds for measured optimism. Trade uncertainty continues to influence business and consumer confidence, but equity markets are primarily driven by earnings over time. Against a backdrop of steady economic fundamentals, we believe maintaining a cautiously constructive outlook remains sensible.
10-Minute Take – What’s next for U.S. tariffs after IEEPA strike down?
The U.S. Supreme Court’s decision against the use of the International Emergency Economic Powers Act (IEEPA) to impose broad-based tariffs is far from the end of the U.S. tariff story. The U.S. administration has already pivoted to new legislative authorities and opened investigations for future measures. For Canada, the implications are more limited than many would think.
In this episode of the 10-Minute Take, RBC Economics’ Claire Fan and Carrie Freestone break down what the ruling means for trade policy and the economy. You can listen to this episode by clicking the link here.
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.