Good day everyone.

 

I hope everyone is doing well and is enjoying the warm weather as of lately. This newsletter is a short one (you’re welcome), summarizing recent events in equity markets as well as providing an economic update.

 

Equity/Stock Market Update

 

It has without a doubt been a wild few months in equity markets, but once again investors who were able to remain steadfast throughout the volatility were nicely rewarded. The saying, ‘sell in May and go away’, did not hold true as the S&P 500 (US stock index) gained over 6% during the month, and was the single best month of May for the S&P 500 in the last 35 years. Similarly, the S&P/TSX Composite (Canadian stock index) climbed up just over 5 % for the month.

To review, the height of the volatility started with the “Liberation Day” trade tariff announcement causing a selloff in global equity markets, with the S&P/TSX Composite & the S&P 500 falling 8.4% & 10.5%, respectively, by the end of the trading week on April 4, 2025. The subsequent 90-day pause on tariffs on April 9, announcements of a U.S. and UK trade deal, and an agreement to roll back tariffs drastically on China have buoyed market sentiment. In fact, equity markets have now climbed back to or above “Liberation Day” levels. Market breadth also remains wide across both defensive and cyclical sectors, as investors assess whether tariff threats may not play out to the extent as initially feared.

 

Economic Forecast Update

 

As we look ahead to the rest of 2025 and into 2026, President Trump has proven he is willing to soften his stance through a number of productive conversations with opposing countries. As the White House walks back its hardline stance, easing previously discussed policies and tariffs, the International Monetary Fund (IMF) now expects global GDP growth to remain positive in 2025, but with risks tilted to the downside—including the possibility of an outright decline if the trade war intensifies. In the IMF’s view, fiscal stimulus measures in Europe and China, and likely in Canada under the new Carney government, should help offset international trade risks.

RBC Economics’ base case assumes most current U.S. tariffs will remain in place, above the 10% effective average tariff rate, until gradual reductions begin in Q4. While they do not assume the Canadian economy will enter a recession in 2025, RBC Economics analysts think GDP growth will likely be slow over the next two quarters before reaccelerating in 2026. On an annual basis, they expect Canada’s GDP to grow by 1.5% in 2025 (largely reflecting strong growth in Q1) and by 1.0% in 2026.

In the U.S., RBC Economics does not think the trade wars are likely to cause a recession, although inflation is likely to rise in the second half of 2025. RBC Economics expects the U.S. economy to eke out small positives for the rest of the year adding up to 1.3% average annualized GDP growth, with the tariffs driving U.S. core inflation to 3.3% by Q4 2025.

RBC Economics believes that tariffs are threatening to push up prices, particularly in the United States, but could generate some offsetting disinflationary forces in the rest of the world as U.S. demand falls. Although higher inflation could cause the U.S. Federal Reserve to delay interest rate cuts, RBC Economics currently expects the Fed to begin lowering rates in September, with 75 basis points (bps) of cuts through the end of this year and a further 75 bps in 2026 bringing U.S. interest rates to a range of 2.75%–3.0% at the end of next year.

The Bank of Canada (BoC) overnight rate currently sits at 2.75%, in the middle of the 2.25%–3.25% range that the central bank estimates is its long-run neutral level. But due to slowing population growth and the negative economic impact of tariffs, RBC Economics now expects the BoC to cut its rates to 2.25% by the summer of 2025, nearly six months earlier than its previous forecast. The expected narrowing of the divergence between Canadian rate and U.S. interest rates in 2026 should help boost the Canadian dollar over the next 18 months, in our view.

 

As always, please do not hesitate to reach out to me should you have any questions or concerns.

 

All the best, Evan

 

Evan Thompson | Senior Investment & Wealth Advisor

Thompson Wealth Management | RBC Wealth Management | RBC Dominion Securities Inc.

T. 403-341-8884 | T. 1-800-663-6087| F. 403-341-8887 | www.thompsonwealthmanagement.ca | 300, 4900 - 50 Street, Red Deer, AB T4N 1X7

 

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