As we’ve highlighted in recent economic updates, this summer has been far from quiet. Markets remain sensitive to a steady flow of headlines, many of them tied to evolving trade developments, which continue to shape investor sentiment.
In this economic update, we examine the second-quarter earnings season which remains in full swing. We’re closely monitoring not just company results, but also forward guidance for signs of how tariff dynamics may be impacting business outlooks heading into the latter parts of 2025 and beyond.
We are also sharing the latest episode of the 10-Minute Take, where RBC Economics' Claire Fan and Carrie Freestone explore the Bank of Canada's decision to hold the overnight rate for a third consecutive meeting. They discuss what's keeping the central bank on the sidelines, how CUSMA exemptions have protected Canada from the worst of U.S. tariff impacts, and the role of growing government spending plans in shaping the outlook.
Economic Update
Q2 earnings
The second quarter earnings season is well underway, with 122 S&P 500 companies reporting this week alone. Overall, results have generally exceeded expectations, helping to lift the projected earnings growth rate for the index. Much of this momentum has been driven by strong performances from several of the “Magnificent 7” large-cap tech companies, along with notable contributions from the Financials sector.
Despite the relatively solid results so far, management commentary has been somewhat more mixed, with some firms striking a cautious tone. Sectoral differences have been shaped by a range of factors, including trade policy, consumer trends, foreign exchange fluctuations and shifting demand patterns. As Federal Reserve Chair Jay Powell recently noted, there’s still “a long way to go” in fully understanding how tariff changes may influence inflation, economic growth and demand, particularly as we look ahead to 2026.
Trade developments
Trade policy developments remain fluid. Over the past two weeks, we’ve seen a combination of tariff escalations and constructive trade agreements. On the escalation front, the U.S. reinstated reciprocal tariffs ranging from 10% to 50% on dozens of countries, marking a pivot toward a more aggressive, country-specific trade approach.
For Canada, duties on select Canadian exports into the U.S. were raised from 25% to 35%. However, Canada reaffirmed the USMCA continues to shield the vast majority of its exports and signaled ongoing negotiations. Meanwhile, tensions intensified between the U.S. and India, where the U.S. administration is preparing to impose an additional 25% tariff in response to India’s continued purchases of Russian oil, part of broader efforts to increase pressure on Moscow to resolve the war in Ukraine.
At the same time, the U.S. had announced a series of new bilateral trade agreements with key partners―including the European Union, Japan, and South Korea―that clarified tariff schedules and improved mutual market access. Additionally, ongoing U.S.-China negotiations suggest a potential extension of the current tariff truce is forthcoming, while Mexico also secured a 90-day reprieve from new U.S. tariffs, allowing more time for discussions on border security and trade-related issues. Lastly, the U.S. unveiled plans for a 100% tariff on imported semiconductors―though the impact may be limited in scope, given significant exemptions for companies with existing U.S. operations or plans to invest in U.S. production. Together, these announcements have helped ease some investor concerns that contributed to renewed optimism in global markets.
Macro developments
In the U.S., recent data has weakened the narrative of economic resilience. The July jobs report came in well below expectations, with downward revisions to prior months adding to concerns about a softening labour market. Compounding the picture, a key activity indicator for the U.S. services sector―accounting for roughly two-thirds of the economy―unexpectedly stalled in July. In response, markets are increasingly anticipating a rate cut from the Federal Reserve, potentially as early as next month, after policymakers held rates steady at their most recent meeting in late July.
Closer to home, the Bank of Canda kept its policy rate unchanged at 2.75% for the third consecutive meeting. Policymakers are likely to maintain a cautious stance in the near term, as they navigate a delicate balance between a recent pickup in core inflation measures and signs of softening economic activity, all against a backdrop of persistent global trade uncertainty.
Summary
On balance, strong corporate earnings results to date, alongside a series of constructive trade developments, have provided a foundation for cautious optimism. Nevertheless, with equity markets trading near all-time highs and elevated valuations, we remain mindful that expectations have risen meaningfully. While corporate fundamentals remain broadly supportive, this heightened bar of expectations could leave markets relatively more sensitive to negative surprises in the near term.
The 10-Minute Take - Why rates aren't budging amidst uncertainty
The Bank of Canada held its overnight rate steady for the third consecutive meeting in July, despite acknowledging some softening in the Canadian economy since January.
In this most recent episode of the 10-Minute Take, RBC Economics' Claire Fan and Carrie Freestone break down the rationale for holding rates steady, how Canada has sidestepped much of the worst impact of U.S. tariffs, and the role of the growing government spending plans in shaping the future for interest rates.
You can listen to the 10 minute epidsode by clicking here.
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