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2025 Q4 Outlook

Hewson's Quarterly Outlook

2025 Q3 | July 7, 2025

The first half of 2025 is firmly in the books. Major equity averages are mostly flat year to date after getting a boost in January, only to retrench -19% on the heels of United States President Trump’s Liberation Day speech, then by the end of June recovering to flat.

Stock prices, or the value of a business, is highly correlated to the direction and magnitude of Gross Domestic Product (GDP) growth. Our view is that GDP will continue to grow in the U.S. throughout 2025 and 2026, delivering higher stock prices and positive rates of return. We have tempered our estimates at just 5% growth in 2025 and 2026 for the S&P 500, as the current “jump off” point is fairly high. Put another way, current expense ratios mean that surprise growth, above that stated above, would need to present itself for stocks to deliver substantially higher returns.

Many challenges to growth are present and the data will have to continue to support these higher multiples. In no particular order, for stocks to continue to reach new highs, we will need:

• No further escalation in tariff or trade arguments (July 8th is the next TEST of trade uncertainty)

• Inflation to remain lower and working its way towards 2%, even as the higher tariffs (higher from 2024) take hold.

• U.S. Federal Reserve (The Fed) cuts that make borrowing cheaper, rents more affordable and home buying or refinancing easier.

• Current AI enthusiasm and spending to continue. JP Morgan estimates that AI could drive over $1 trillion of spending by 2030, including investments in generative computing, networking, and storage infrastructure.

• A calming in world conflicts would provide positive animal spirits (Ukraine/Russia, Israel/Iran, India/Pakistan, just to name a few…).

• Recession to remain off the table. Slowing is fine, stalling is not, in terms of GDP growth.

The U.S. economy has continued to prove its resiliency, first with the spending of COVID surpluses, and secondly from the complete trade paralysis, self-inflicted by the March and April trade recklessness. In recent economic releases, jobs numbers continue to grow, and inflation has yet to make a move higher due to the newly imposed tariffs. This is an environment where new highs for stocks could be reached, and we believe they will. However, we also believe that the current state of geopolitical chaos will continue to deliver these higher levels along with significant volatility fluctuations. In other words, higher highs in markets are likely coming, but not without periods of stomach twisting discomfort.

Below, we explain the actions we have taken in our portfolios to help alleviate what we anticipate being a continued period of higher equity market volatility, mainly caused by Trump’s unpredictable and reckless behavior.

Risk, Volatility, & Noise

We realized during April to June of this year that the current White House agenda should be expected to remain turbulent at least until the midterm elections. Given Trump’s “control” of both houses, our view is that he will continue to push his agenda, at least until the midterms or such a time when he no longer has this power.

This absolute power has created volatility that we last saw during the COVID period. Volatility ratings have gone through violent swings and taken portfolio values for a ride. We think that turning down the volume on Trump’s agenda, as well as becoming less sensitive to the daily rhetoric, is important to Maintaining Objectivity and instead focusing on the data as we make Asset Allocation decisions.

Asset Allocation

Recently we moved our portfolios very close to neutral from a position of underweight in the first quarter, as we feel the “wall of worry” has slowly started to crumble with inflation behaving, and jobs continuing to show strength. Although we will find out more on July 8th on the trade front, we do find some comfort in Trump’s continued willingness to “make a deal” even if it includes (in my view) unnecessary drama.
When it comes to Asset Allocation, we feel we need to think longer-term and realize that it is time in the market, not timing the market, that will deliver our clients ultimately greater returns. Above, the graph shows that overreacting to news and selling-down positions at the wrong time can have a tremendous impact on returns. Staying invested and rebalancing frequently will lead to better returns and ultimately, lower volatility.

Sector Bias

From a sector perspective for a while now and continuing this quarter, we are overweight Technology and the next wave of the AI revolution, as well as Industrials and Infrastructure. Simply put, when all this trade politics is put behind us, companies in the U.S. that make things, from computer chips to steel bars and car parts, are going to be good companies to be invested in.
New this quarter, we have been adding names that offer us an increased dividend yield. We have been focusing on Canadian companies that are defensive in nature, have a history of growing dividends, and are in industries that are outside of the purview of the current tariff standoff. In the chart below, you can see how well dividend growing stocks perform over time and how they do so with lower volatility. Exactly what we are looking for!

Stock Selection

As we have believed for many quarters, there is no room for mistakes as it pertains to stock quality. We are fine to pay more for companies that demonstrate pricing power, competitive products, strong management teams, and that operate in industries with high barriers to entry.

New in the second quarter and going forward, we have amassed larger positions in 8-12 of our “pillar” companies. These are companies that we believe will continue to grow in any environment as well as provide ballast from swings in volatility.

The Outlook

We enter Q3 in an optimistic fashion, recognizing that the worries presented in the first half of the year and worse case scenarios have largely been avoided. We believe that new equity market highs are ahead if the U.S. economy continues to show resilience in the face of higher tariffs and geopolitical turmoil. At the end of the day, the U.S. consumer which represents approximately 74% of GDP is employed and spending.

We will continue to Manage Risk, Maintain Objectivity, and follow our long-term investing rules that have seen us through other times of increased volatility.