“Out of adversity comes opportunity.”
- Benjamin Franklin, politician and one of the Founding
Fathers of the United States.
Highlights
- Current Economic Outlook
- Our investment strategy
- RRSP & TFSA contribution reminder
Current Economic Outlook
A Chinese AI chatbot rocked U.S. markets this week – the DeepSeek app overtook Western rivals including OpenAI's ChatGPT to become the most downloaded free app in the U.S. shortly after its launch. The chatbot was reportedly developed for about US$6 million, a fraction of the cost that Western tech giants earmarked to power and roll out AI products and services, including a US$500-billion project by OpenAI and its partners.
As widely expected, the central bank lowered its policy rate to 3% from 3.25%, its sixth consecutive cut. The accompanying communiqué pointed out that the substantial easing conducted as of late was having its desired stimulative effect on the Canadian economy. Importantly, the Bank of Canada now judges the risk of inflation as roughly balanced around the 2% target.
The following extract from the Monetary Policy Report Press Conference Opening Statement is particularly pertinent:
« Unfortunately, tariffs mean economies simply work less efficiently—we produce and earn less than without tariffs. Monetary policy cannot offset this. What we can do is help the economy adjust. With inflation back around the 2% target, we are better positioned to be a source of economic stability. However, with a single instrument—our policy interest rate—we can’t lean against weaker output and higher inflation at the same time. As we consider our monetary policy response, we will need to carefully assess the downward pressure on inflation from weakness in the economy, and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions. »
Trump’s first week back in office brought about a flurry of executive orders and no shortage of headlines as the president acted on a range of topics including tariffs, tax cuts, oil prices, and Fed policy. A less-aggressive-than-feared approach to China, at least initially, alongside further talk of tax cuts, supported riskier assets as the S&P 500 rose to fresh highs, the TSX rallied, and credit markets remained optimistic.
What a week and it’s only Thursday morning!
In the long run, stock markets tend to be driven by two factors: the actual earnings from the companies within the market and the value that investors are willing to ascribe to those earnings. The former tends to ebb and flow along with the upswings and downswings of the economy. The natural tendency for the economy is to grow, and earnings growth therefore tends to be more positive than negative. Valuations on the other hand are more heavily influenced by investor sentiment and can change, sometimes significantly, from one year to the next as investors anticipate whether conditions will improve or deteriorate in the future.
Still, we believe the onus for future market gains is increasingly shifting to earnings because valuations are already relatively high. Earnings growth for the S&P 500 was roughly 3%, 6%, and 12% respectively for the past three years. Much of the growth was fuelled by the large-cap technology stocks whose earnings growth has benefitted from capital expenditures related to artificial intelligence. That trend is expected to change somewhat this year. While growth for technology is likely to remain robust, growth elsewhere is expected to broaden and accelerate throughout the year leading to mid-teens earnings growth for the broad market over the next few years. Some of the factors expected to benefit earnings include less regulation, lower taxes, and a subsequent reacceleration in economic growth.
In summary, the U.S. market is currently not particularly cheap. That alone does not present a problem as high valuations have historically not been indicative of what to expect from the market in the near-term. However, it does suggest that expectations are high, particularly in certain sectors, and that companies will have to deliver on the earnings expectations that are embedded in current market prices. As a result, we will be paying close attention during the earnings season that is now underway and will be particularly focused on the outlooks from company management teams.
Our investment strategy
When it comes to evaluating which stocks to buy, it is important to look at the big picture of each company and its long-term horizon.
Depending on the year, it can happen that despite an increase in profits and dividends share prices stagnate or sometimes even fall. In 2024, although the year was strong on the stock market, the price of certain quality stocks has declined. Nevertheless, over time stock values tend to keep pace with earnings.
As you will see in this table, the following stocks show positive signs on the macro level including dividend growth and share price return over a 5-year period despite lower one-year returns.
| Symbol | Name | 5 Year EPS1 Growth | 5 Year Dividend Growth | 5 Year Stock Returns Annualized | 2024 Stock Return |
| Canadian Stocks | |||||
| ATD | Alimentation Couche-Tard Inc. | 12.10% | 26.20% | 14.94% | 3.11% |
| CNR | Canadian National Railway Company | 8.60% | 11.30% | 6.44% | -10.51% |
| CP | Canadian Pacific Kansas City Limited | 7.50% | 8.00% | 10.34% | 0.05% |
| US Stocks | |||||
| PEP | PepsiCo, Inc. | 7.60% | 6.70% | 5.13% | -7.59% |
| LVMUY | LVMH Moët Hennessy Louis Vuitton | 21.30% | 20.80% | 8.19% | -18.39% |
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| 1 | EPS : Earnings per share | ||||
Source : Factset
It is sometimes the case that excellent financial results are only reflected in the share price after a certain time has elapsed. The most important principle to understand is that patience is essential.
Overall, we expect some continued pessimism about Canada and its near-term economic prospects. Even so, interest rates may continue to move lower which could drive anticipation of better economic and earnings growth later this year or in early 2026. Meanwhile, sentiment is nearly the opposite when it comes to the U.S.
While we remain confident on stocks over the longer term, we recognize that in the shorter-term sentiment is overly optimistic and valuations remain elevated in certain pockets, particularly in the U.S. As a result, we have kept our stock allocation focused on high quality companies with growing dividends.
"The wise investor knows that market timing is futile, and the only way to
achieve consistent results is through a disciplined and patient approach.”
- John Bogle, American investor, business magnate and philanthropic
RRSP & TFSA contribution reminder
- RRSP: The last day to contribute for the 2024 fiscal year is Monday, March 3rd, 2025. For the 2024 tax year, the maximum is 18% of your earned income, up to a maximum of $31,560, minus the pension adjustment, if applicable. The maximum for 2025 is $32 490.
- TFSA: This year's added contribution room is $7,000, bringing the total contribution room since 2009 to $102,000.
Our priority is to preserve your capital over the long term, while remaining well-positioned to benefit from sufficient returns to meet your personal objectives, and without taking unnecessary risk.
As always, we are available to answer your questions.
Benoit Legros, B.A.A., CIM, FCSI
Senior Portfolio Manager and Wealth Advisor