Good day everyone.

Despite ample reasons for pessimism this year, the global economy and markets have largely exceeded expectations. In fact, I’ve had several clients make similar comments to me this year, stating they are happily surprised to see how well their portfolios are performing despite the ongoing trade turmoil and conflicts overseas. My reply has been that equity markets have been able to ‘climb the wall of worry’ because the fundamentals of the stock market and economy are in good shape; simply put, the expectation for a U.S. recession is not on the horizon and corporate earnings growth remains strong. Focusing on the fundamentals helps to separate the signal from the noise.

Let's look a little further into this below and review how central banks are managing inflation expectations.

A Reassuring Q2 Earnings Season

Earnings growth is a key driver of stock prices because it reflects a company’s profitability and future potential, which investors heavily weigh when valuing a stock.

With the U.S. earnings season now largely complete, results were generally better-than-expected, with the realized earnings growth rate handily surpassing consensus estimates. Notably, the number of earnings estimate upgrades relative to downgrades reached its highest level since late 2021, marking a reversal from earlier cuts prompted by uncertainty over the impact of supply chain disruptions, which to date have proven less severe than initially feared.

While analysts have attributed the solid earnings performance to effective tariff-mitigation strategies and a weaker U.S. dollar, they also cautioned that the full effects of tariffs have yet to be felt given the front-loading of goods earlier in the year has likely deferred the impact. On a more positive note, persistently strong results and constructive guidance from large-cap technology and adjacent companies, key beneficiaries of the AI-related investment cycle, have provided crucial support to the S&P 500’s earnings momentum.

On balance, the earnings outlook remains supportive of equity markets. Consensus estimates for the S&P 500 are pointing to profit growth of around 9% in 2025 and 12% in 2026. Globally, the MSCI All-Country World Index is expected to generate earnings growth of 9% in 2025 and 11% in 2026.

U.S. Inflation Readings Flash Mixed Signals

Elsewhere, markets are closely watching the transmission of tariffs through the economy. The front-loading and inventory buildup at pre-tariff prices have temporarily shielded consumer prices and corporate profit margins. But as these stockpiles unwind, firms are likely to face an uncomfortable decision: absorb the tariffs at the expense of lower margins or pass the tariffs onto consumers through price increases.

Markets are attentive to Federal Reserve Chair Jerome Powell’s speech at the annual central bank conference in Jackson Hole, Wyoming. This event has long been a key platform for Fed chairs to potentially provide guidance on the Fed’s thinking around monetary policy. This year, markets will be parsing Powell’s comments for hints about whether the Fed will maintain its “wait-and-see” approach or signal a possible policy shift. A weaker-than-expected jobs reports for July prompted markets to price in a 25-basis point cut at the Fed’s September meeting. But with inflation still above the central bank’s 2% target, policymakers face a tricky task of balancing their dual mandates of maximum employment and stable prices.

What About Canada?

Meanwhile, consumer price pressures in Canada have eased, largely due to the unwinding of the consumer carbon tax back in April. On trade, the USMCA free trade agreement continues to backstop duty free access to the U.S. market for most Canadian exports. The U.S. Census Bureau reported 92% of Canadian exports to the U.S. crossed the border duty free in June―up slightly from 91% in May and 89% in April. The Bank of Canada (BoC) has held its benchmark rate steady at 2.75% for three consecutive meetings since March and RBC Economics expect the BoC is unlikely to cut again in this cycle.

Key Takeaway

In the U.S., an uptick in producer prices and the prospect of consumer price increases have renewed concerns that trade-policy uncertainty could stoke inflation in the near term. Nevertheless, strong corporate fundamentals alongside upward earnings revisions have continued to provide a foundation for cautious optimism in markets. For portfolios, “invested, but watchful” remains a sensible stance to us as we continue to monitor developments on trade policy and corporate earnings.

Thompson Wealth Management

Many of you have likely noticed that we have a new addition to the team, Evelyn. Evelyn joined our team six months ago and has proven to be a great addition. To be clear, Evelyn is not replacing Tracy; it is common during review meetings for clients to tell me how great a job Tracy does, and so I assure you that Tracy is here to stay. We hired Evelyn because Tracy’s workload was getting to be too much, and we needed to expand the team. As many of you know, it is not easy to find good people, and as such I very much appreciate the value that Tracy & Evelyn bring each day. If you do get a call or email from Evelyn, rest assured that she is a member of our team.

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

This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license. © 2025 RBC Dominion Securities Inc. All rights reserved.