Investors have been closely focused on the U.S. election in recent weeks, with Donald Trump elected 47th president of the United States. Both U.S. and Canadian equity markets reached new all-time highs after a post-election boost, while markets overseas have trended lower. Amid this election rally, U.S. economic data has largely surprised to the upside. This, in addition to some suggestions that inflation and interest rates may remain higher under a Trump administration, has contributed to rising bond yields, even as the U.S Federal Reserve cut interest rates for a second consecutive time at its latest meeting. Today, we share some thoughts on equity markets in the wake of recent developments.
Equity markets often rally as uncertainty recedes, which likely explains some of the recent market gains. Rather than the close and potentially contested outcome many feared, Donald Trump was decisively announced as president in the early hours following election night. Markets may also be enthused by the potential for deregulation and tax cuts to spur higher growth and offset any potential drags from proposed immigration reforms and tariffs. These sentiments were echoed by companies reporting earnings after the election. Some expressed optimism about regulatory easing and tax reductions, while others suggested they are wary of proposed tariffs.
The U.S. third-quarter earnings season is nearly complete and has been less remarkable than recent quarters, though markets appear unfazed. Company profits grew around 8%, roughly double expectations. And earnings are forecasted to grow by nearly 13% year-over-year in 2025, the strongest pace since 2021. Encouragingly, more of this growth is expected to come from more sectors, suggesting a broadening in the earnings story and less reliance on the large-cap tech sector. Moreover, pro-growth policies from the new administration may further support earnings next year.
The strength witnessed by North American equity markets this year have been impressive, with stock indices up over 20%. Ironically, these gains have exacerbated one of the main concerns we have had around stocks: valuations. From a valuation perspective, the U.S. stock market’s price-to-earnings ratio—a key measure reflecting how much investors are willing to pay per dollar of expected earnings—stands just above 22. This is well above its historical average. And while this tells us little about how equities will perform in the months to come, it does suggest that the U.S. stock market is reflecting a lot of positivity, optimism, and lofty expectations for future earnings growth. We have often used periods like this to recalibrate and lower our expectations around longer-term returns from a specific asset class when it has traded at similar premium levels. Fortunately, this particular dilemma is more tied to U.S. stocks and less so to the Canadian equity market, where valuation levels are less demanding.
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