Dear Fellow readers,

 

Approaching the one-month point of the U.S. federal government shutdown, the Federal Reserve (Fed) has been forced to make an interest rate decision with only partial visibility into the economy. Meanwhile, signs of weakness in pockets of the Canadian economy prompted the Bank of Canada (BoC) to follow suit with a rate reduction. Although trade tensions remain an overhang, equity markets have been demonstrating resilience, supported by strong corporate earnings and investor confidence in underlying fundamentals. We discuss these themes further below.

 

Q3 Earnings

 

The U.S. earnings season is now in full swing, with nearly one-third of S&P 500 companies reporting this week. In the absence of much official U.S. data, corporate results and management commentary have become even more valuable in gauging the health of the economy. So far, earnings have exceeded expectations, with companies surpassing analysts’ estimates at rates above five- and ten-year averages.

 

With many global equity markets hovering near all-time highs, continued earnings delivery and constructive forward guidance will be key to sustaining upward momentum. Over the past week, investors have focused closely on Big Tech earnings, tracking their capital spending trends and assessing the path forward for AI-related investments. So far, the results have been perceived favourably, lending support to equity markets with tech companies announcing continued investment, collaboration, and innovation.

 

Interest Rate Cuts

 

Amid limited economic visibility caused by the ongoing government shutdown, the Federal Reserve opted to trim its benchmark rate by 0.25% this week. With many official reports unavailable, policymakers leaned on alternative data sources and commentary from the business sector to gauge inflation dynamics and consumer demand. The September inflation report—released as an exception due to its role in determining Social Security adjustments—offered one of the few clear signals. While inflation remained above the Fed’s 2% goal, the softer-than-expected reading and steady underlying trends gave officials confidence to ease policy.

 

Fed Chair Powell cautioned, however, that continued data disruptions could complicate future decisions. He noted that another rate cut in December “is not a foregone conclusion,” stressing the Fed’s need to balance “upside risks to inflation and downside risks to employment” amid an increasingly uncertain data environment.

 

In Canada, the BoC also lowered rates by 0.25%. Despite a modest uptick in headline inflation, easing business inflation expectations, the removal of retaliatory tariffs, and a tepid labour market provided scope to cut for a second consecutive meeting. However, policymakers tempered expectations of more cuts in the months ahead, noting that persistent trade disruptions could cause structural scars to the economy, potentially making monetary policy a less effective tool in stimulating growth while keeping inflation anchored around its target range.

 

Trade Frictions

 

Canada has once again drawn attention from the U.S. administration, as President Trump proposed an additional 10% tariff on Canadian goods in response to a recent anti-tariff advertisement. While details remain unclear, most Canadian exports continue to benefit from USMCA protections, helping cushion the overall impact. Nonetheless, ongoing sectoral tariffs—particularly in steel, aluminum, and autos—continue to weigh on industrial activity and may constrain growth prospects. With USMCA renegotiations on the horizon in 2026, we’ll be paying close attention to how this renewed friction evolves.

 

In contrast, there was a more positive turn in U.S.–China relations. The in-person meeting between Presidents Trump and Xi Jinping in South Korea this week delivered a temporary but constructive breakthrough. The two countries have agreed to suspend export controls on rare earth minerals and some semiconductors as part of a broader one-year trade truce that will also see the U.S. reduce fentanyl-related tariffs and China resume soybean purchases. While the agreement helps reduce the immediate risk of further tariff escalation, the short duration of the truce means policy uncertainty is likely to persist and could remain a source of market volatility.

 

Takeaway

 

With corporate earnings season off to a broadly positive start and central banks moving to support growth, the foundation for cautious optimism in equity markets appears to be intact. The combination of interest rate cuts and resilient earnings reinforces our view that maintaining an “invested but selective” stance remains appropriate. We continue to monitor the evolving policy landscape closely, balancing opportunity with vigilance in a still-uncertain environment.

 

Sincerely yours,

 

The Martin Roy Group