A continued decline in inflationary pressures, combined with ongoing signs of a cooling Canadian economy, prompted the Bank of Canada to cut interest rates for the fifth consecutive time. In the U.S., the Federal Reserve is also expected to cut rates this week, though investors have tempered their expectations for how far the Fed will go amid resilient economic data. Today, we review 2024 and look ahead to 2025.

This year, while not yet complete, has been another strong one for equity markets. Global stocks are up over 20% so far, led by North American equities. International and emerging markets have also seen above-average returns, though these have been less pronounced. Market gains were led by the artificial intelligence theme, as investors anticipate a potential step change in future productivity and growth. The U.S. mega-cap “tech” stocks have accounted for roughly half of U.S. equity market returns this year.

In Canada, the technology sector has similarly had strong performance. The gold sector was another standout driving the commodity to new highs. Notably, the financial sector contributed the most to the Canadian stock market’s strong returns. While performance varied, the group performed well as recession fears eased and businesses and households demonstrated greater resilience under the weight of high interest rates.

This year marked a shift in central bank policy, with many cutting interest rates. That has fueled some hope of a better economic and earnings story in 2025 and has led to a broadening in the group of stocks and sectors participating in the market rally. Meanwhile, the bond market experienced less volatility, with yields fluctuating within a narrow range as investors gained confidence in the outlook for inflation and growth. This stability led to solid returns across both government and corporate bonds.

Looking ahead to 2025, we are mindful that valuations – particularly in the U.S. equity market – are relatively high following another year of strong performance. Yet, valuations are supported by healthy earnings growth and solid economic projections for both 2025 and 2026. In Canada, earnings growth is similarly expected to support a more reasonably valued stock market, though some uncertainty tied to the impact of tariffs remains.

Overall, we are pleased with the contributions that both stock and bond markets have made to our client portfolios this year. And while we see reasons to be optimistic about the year ahead, we are mindful that investor sentiment has become more positive and stock prices already reflect the expectation of higher growth next year. That has left markets a bit more vulnerable should economic and earnings developments fall short of expectations. We express our sentiment as: “watchful, cautious, but invested”.

We extend our warmest wishes to you and your loved ones this holiday season and look forward to supporting you in the year ahead.