To my clients:
It was a mixed week for North American stock markets with the Canadian TSX finishing down 0.3%; the U.S. Dow Jones Index up 0.8%; and the U.S. S&P 500 up 0.7%.
Last week I noted that this could be a big week for the markets. And in a way, it was, although it would be hard to discern from just the modest weekly change in index levels I always cite in my opening line of the update. Recapping, we had a Fed rate decision; earnings announcements from 5 of the 7 “Magnificent 7” companies; a trade “deal” (as underwhelming as it may have been) between the U.S. and China; and a dinner conversation between Prime Minister Carney and President Trump (if only to talk baseball!!).
On rates, the Fed did as expected on Wednesday and cut the key lending rate by 0.25%. However, the market was surprised by Fed Chair Jerome Powell’s accompanying press conference at which he stated that there were strongly differing opinions amongst Fed committee members and that another rate cut at the December meeting was “not a foregone conclusion – far from it.” I emphasize again – this was a surprise to the markets which had dialed in another rate cut in December with approximate 90% certainty. So as a result, a market that started out the week strongly on Monday and tuesday, dipped on Wednesday before the close.
Then, just after markets closed on Wednesday, the first three Magnificent 7 companies reported earnings. Alphabet (aka Google) reported stellar better-than-expected results across all metrics; Microsoft largely met lofty expectations; and Meta (aka Facebook) also mostly delivered on lofty expectations - except on the expense front. Alphabet’s stock soared as a result (up ~ 8% for the week); Microsoft treaded water (down less than 1% for the week); and Meta was punished (down roughly 12% for the week). Obviously these results are frustrating in the short term given my switch last week from Alphabet to Meta. However, the move from Alphabet was forward looking (on concerns of rising competition for Google search as AI companies release their own web browsers. Relatedly, there are some very serious data safety issues that might result from the use of AI powered browsers. Myself, I’ll avoid their use until there are better safety assurances available. THANK YOU to the client who passed along a very detailed article on the topic!). With respect to Meta, the company surprised analysts by spending more than expected during the quarter and simultaneously guiding to higher spends on AI and data centers in the year ahead. Frankly, in the current environment, most competitors in the Mag 7 would have been rewarded with such an announcement, but there is still some skepticism in the analyst community about Meta’s expense discipline given their ill-advised expenditures on the so-called “meta-verse” in the early 2020’s. Admittedly, if expenditures soar out of control, then this could be a problem. But a) I’d like to think Meta learned from their meta-verse experiment; and b) more importantly, indicators are that Meta’s current data center/AI spends are actually being rewarded with higher revenues and margins. In other words, I believe Meta will recover from this disappointing week.
On Thursday, President Trump and President Xi announced a trade “deal” which was more of a temporary 1-year “truce” than a deal. Whether deal or truce, the fact of the matter is that the agreement more or less restores the trade relationship that existed in the Spring (just before Trump ratcheted up tariffs materially as part of his “Liberation Day” agenda), and did little to revise the pre-existing status quo in favor of a more meaningful framework for the future. That said, at this stage a truce is better than nothing, and there are follow-up meetings set for Trump in Xi in the first half of 2026. Perhaps further progress might be made then.
Later on Thursday, the other two (Apple and Amazon) Magnificent 7 companies reported their earnings. Apple (up nearly 3% for the week), much like Microsoft, mostly met lofty expectations; while Amazon (up nearly 9% for the week), mirroring Alphabet, exceeded expectations including an all-important re-acceleration of its cloud computing results.
Oh yeah, Trump and Carney actually spoke – at an 8-person dinner hosted by the South Korean President Lee Jae-Myung. The topic? Apparently baseball… just baseball. Hopes for a thaw in U.S./Canada trade relations will have to wait.
So it was a busy week. To my lens the mostly positive narrative remains: trade tensions are incrementally improving; the Fed is lowering rates (albeit at a possibly slower pace than expected); and earnings remain very strong. As always, I’ll continue to assess evolving conditions.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
RBC Dominion Securities Inc. │ Tel: 604.257.7569
2950 Glen Drive, 7th Floor │ Coquitlam, BC │ V3B 0J1
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com
Visit Our Website: www.nickscholte.ca