Good day everyone.

I hope you are doing well, and thank you to those who sent in a nice email (my inbox was flooded) or who I spoke with over the phone or video about my ankle. Everything is healing well, and I think the challenge for me over the next few weeks will be to remain patient with my recovery. I can say that my ability to balance on one foot has increased immensely. Enough about me, let’s dive into markets.

After achieving impressive returns in 2024, equity markets have been exhibiting increased volatility over the last few weeks. Although we know that bouts of volatility are a regularly occurring feature of equity markets, I acknowledge that it can still be an unpleasant and somewhat stressful experience for investors. I find it helpful during these times to remind myself that ‘volatility is the price we pay for growth’, and as such the best opportunities are found where there is a disconnect between perceived value and price.

Adding to this recent volatility is of course the unpredictability of Trump’s trade tariffs. Markets as we know do not like unpredictable environments and as such we have seen the markets struggle to find a clear path forward. Although this situation remains very fluid and the permutations of how tariffs might play out are many, our base case looks for temporary or more targeted levies as opposed to a long-duration and broad-based approach. Given the situation we find ourselves in, it reminds me of a quote from Warren Buffet, who said, ‘the stock market is a device for transferring money from the impatient to the patient”, wise words to follow in my opinion.

Below is a brief summary of our outlook across various assets classes, and after this we will look at a few really cool charts.

Fixed Income / Bonds: Attractive Outlook: Bonds remain an attractive asset class given their high yield and low risk rating. For example, a core bond position for many of my clients has seen a 12-month gross return of around 7.0%. The yield-to-maturity is around the 4.5% range, which is a good indicator of future returns. Last year bonds outperformed GICs, and I expect this to be the case again this year.

While most major central banks are in easing mode (lowering interest rates), the pace and scale of rate cuts has been diverging. The Federal Reserve (the US central bank), constrained by more persistent inflation risks has opted for a measured approach to monetary easing, while the Bank of Canada has been able to bring rates down more swiftly amidst weaker economic conditions. Despite the potential for renewed interest rate volatility, we believe fixed income markets continue to present areas of opportunity, with mid-to-high single digit returns achievable in a favorable environment.

Equities / Stocks: Although global real GDP growth is projected to moderate to 2.9% in 2025―down from 3.2% in 2024―this is still a reasonably decent pace that should allow corporate profits to rise over the coming quarters. Consensus estimates suggest earnings for the MSCI All Country World Index are expected to rise by around 9% in 2025. The recent broadening of earnings growth beyond the tech-related sectors is also an encouraging sign for more balanced equity market breadth.

Valuations, however, remain lofty. The MSCI All Country World Index trades at 18x forward 12-month earnings estimates, meaningfully above the long-term average of around 15x. While sustained earnings growth can help stocks grow into forward valuation multiples, we believe the range of potential outcomes for the economy has likely widened. We expect U.S. trade policy to remain a persistent source of uncertainty, with potential knock-on effects for corporate fundamentals.

• Canadian Equities / Stocks – Neutral Outlook: Economic data suggests improved domestic growth on balance but persistent trade threats cloud the outlook. Canadian economic growth accelerated to 2.6% in Q4 2024 from an upwardly revised 2.2% in the prior quarter. Household spending has shown signs of life as consumers have enjoyed relief from lower policy rates, and a firmer employment backdrop has also helped. Looming over these incremental positives is the specter of U.S. import tariffs. The permutations of how tariffs might play out are many but our base case looks for temporary or more targeted levies as opposed to a long-duration and broad-based approach. Lower rates should support the nascent improvement in economic data and domestically-derived earnings while the domestic equity market trades at a reasonable 15.1x earnings (Canadian stocks are reasonably priced).

• United States Equities – Neutral Outlook: The U.S. is expected to remain the global growth engine with real GDP growth hovering over 2% in 2025 based on RBC Global Asset Management’s forecasts, as the business cycle remains in expansion, labour market continues to be solid albeit with some signs of softening, and strong AI-related capital spending. Consensus earnings estimates for 2025 are implying year-over-year growth of around 12%, with earnings growth previously dominated by the Info Tech sector, expected to come from a wider range of sectors. Given the extended valuations (US stocks are more expensive), we believe that geopolitical concerns, policy uncertainty, and Trump’s unpredictable governing style are risks to monitor and for these reasons we recommend maintaining a neutral stance.

• International Equities – Cautious Outlook: European equities have performed well to start the year. Although the eurozone’s GDP growth decelerated in the final quarter of 2024, recent economic data have broadly surprised positively, indicating a potential stabilization in economic trends thanks in part to the stimulative effects of the European Central Bank’s (ECB) rate cuts over the past year. The reduction in political uncertainty following Germany’s election in late February, which eased some concerns of political gridlock, has also bolstered sentiment. Meanwhile, Japan’s economy marked a third consecutive quarter of growth driven by a strong rebound in business investment. Further rate cuts from the ECB, a potential ceasefire in Ukraine, and still reasonable equity valuations suggest equities could continue to perform well in the near term. However, we remain somewhat cautious due to U.S. trade policy uncertainty and tepid Chinese growth prospects, which represent notable risks to the relatively more cyclical composition of international equity markets. We believe a more cautious stance is appropriate.

• Chinese Equities – Cautious Outlook: China’s economy exceeded expectations in the final quarter of 2024, helping to meet the full-year growth target of 5%. However, consumption growth remains below pre-pandemic levels and the economy continues to face structural headwinds from an ongoing property market downturn, persistent deflationary pressures, and lackluster consumer and business confidence. Chinese policymakers have pledged to shift stimulus measures toward supporting demand, but we remain skeptical that the bold measures required to drive a sustainable growth recovery in China will materialize in the near term. Moreover, renewed U.S.-China trade frictions raise concerns that Chinese exports will come under pressure and could prolong the country’s economic woes.

If you are still with me, let’s look at a few charts to help get a better understating of what is going on.

When we look at the past twenty years, we can see that seasonality is a factor here as markets do tend to be choppy January to March, and this is especially true when the previous year’s performance was above average. See the chart below from Carson Investment Research.

This chart below from our technical strategist, Robert Sluymer, illustrates how the start of the first election year tends to be weak with improved growth in the second and third quarters (blue line). Going into the second year (red line) history shows a pattern of a mid-cycle weakness followed by an uptick in performance in the final quarter.

Finally, measures of investor sentiment have recently turned overly bearish (negative). This reading functions as a contrarian indicator as these periods of overt pessimism tend to be followed up with a rally.

As always, please reach out to me if you are feeling concerned with recent events. Talking with my clients is obviously an important part of my job, but it is also the best part of my job. So please do not hesitate to call or email.

All the best, Evan