The market backdrop appears incrementally constructive, with the U.S. government shutdown now behind us and a strong earnings season bolstering equity market sentiment. We discuss these developments along with some thoughts on the Canadian federal budget in more detail below.

U.S. Government Reopens

After more than 40 days, the longest federal government shutdown in U.S. history has officially ended, with President Donald Trump signing a bill to restore federal funding this week. From a market standpoint, the resolution helps remove a notable source of uncertainty that had, at times, weighed on investor sentiment and confidence in the economic outlook. In addition, while the shutdown likely caused a short-term slowdown in economic activity, history shows the economy tends to make up lost ground once normal operations resume.

Earnings vs. Valuation

As we approach the end of Q3 reporting season, corporate results have been broadly upbeat. Earnings beats across the S&P 500 have run above long-term averages, reinforcing the resilience of corporate profitability. However, the picture is somewhat more mixed within Big Tech and Artificial Intelligence adjacent sectors, where volatility has picked up as investors seem to be assessing a compelling long-term AI growth opportunity against valuations that, in some cases, sit well above historical norms.

The encouraging news is that earnings continue to underpin the equity market’s strength. Global equities are up roughly 20% in U.S. dollar terms year to date. With most valuation metrics hovering near the upper end of their 10-year ranges, continued earnings delivery will be essential to supporting markets. We think recent choppiness in AI-related sectors underscore how dependent certain parts of the market have become on sustained AI enthusiasm, reinforcing the importance of selectivity, valuation discipline, and diversification.

Canadian Federal Budget

Canada’s federal government released its first budget under Prime Minister Mark Carney last week. The much-anticipated Budget 2025 features expansionary spending aimed at infrastructure, defense, housing and tariff-affected industries.

The fiscal plan is front-loaded: the projected $78 billion deficit for this year is higher than previously forecast, but the government expects the deficit to decline to $57 billion by 2029–30. The minority Liberal government still needs parliamentary support from other parties to pass the budget, but broadly, Budget 2025 appears to strike a reasonable balance between strategic investment and fiscal prudence.

Takeaway

Although uncertainties around global trade and growth persist, we expect the end of the U.S. government shutdown to remove a key overhang. Earnings momentum remains a meaningful tailwind for equities, but we believe elevated valuations and the concentration of market leadership in AI-related sectors warrant ongoing attention. In Canada, implementation of Budget 2025’s capital-focused measures will play an important role in shaping the economic outlook into 2026. In our view, maintaining an “invested, but watchful” posture remains appropriate given the current mix of opportunity and risk.

Thanks for tuning in and see you in two weeks.