Dear Friends,

I hope you had a great Canada Day weekend.

Global equities have been somewhat directionless over the past few weeks. One notable development was the Canadian inflation report for May, which was higher than expected for the first time this year. This has moderately reduced expectations for a July rate cut, though markets still anticipate another one to two cuts from the Bank of Canada through the remainder of the year.

It's hard to believe, but we have reached the year’s midway point. Below, we take the opportunity to reflect on this year’s developments and share some thoughts on the outlook. We also want to highlight the Global Insight Mid-Year Outlook, published by some of the thought leaders across our firm. The special report on U.S. debt is particularly thought-provoking, though the whole piece is worth a read.

There has been encouraging progress on inflation this year, albeit with different regions seeing different rates of decline. Yet, services inflation has remained sticky throughout most of the developed world thanks to wage growth, resilient demand, and shelter-related costs. Even so, fading pressures have allowed a few central banks to begin cutting rates, while others, like the U.S. Federal Reserve, suggest cuts remain a possibility later this year. On the growth front, things have been arguably better than anticipated, given many investors were expecting a recession to have already begun in various jurisdictions. The manufacturing sector has been generally weak, offset to a large degree by the services side of the economy. The consensus view is that a soft landing, where the economy slows but avoids a material deterioration in employment, is now more likely for many economies, particularly the U.S.

The backdrop above has driven global equity markets higher this year, with the U.S. leading the way. But, as has been the case for some time, U.S. gains have been heavily influenced by large-cap technology, and more specifically, anything related to artificial intelligence. This momentum may continue for some time, but a few things warrant attention.

The U.S. market has become more expensive over the past year. While valuations are more reasonable if one excludes the large “tech” stocks that have led markets, they still sit above historical averages. That may have bigger implications over the longer-term than it does for the rest of the year. Meanwhile, our confidence in the sustainability of a bull market is usually highest when gains are driven by a broad range of stocks and sectors. But that hasn’t exactly been the case this year, though there is always the possibility that market leadership could broaden, or shift to other sectors. We don’t view investor sentiment as overly optimistic yet, which can often be the case near market peaks, but it is more positive than it was a year ago, suggesting there is growing risk of some investor complacency. Most importantly, the risk of recession remains above average based on various factors we monitor. As a result, we believe the range of possibilities for equities is wider than normal despite the market strength to date.

Outside the U.S., and “tech” in particular, equity markets sit at valuation levels that are more balanced, reflecting some of the economic headwinds that exist in parts of the world. On the fixed income front, yields remain attractive in our view, and higher quality bond exposure can act as a stabilizer in portfolios in the event equity market volatility returns. Overall, our approach to managing portfolios remains a bit more cautious at this time given the range of potential outcomes. We remain committed to regular rebalancing to mitigate the risk of overexposure to any one market or sector’s idiosyncrasies.

We want to wish you and your loved ones a safe and happy summer.

Should you have any questions, feel free to reach out.

Best Regards,

Frank