A continued decline in inflationary pressures, combined with ongoing signs of a cooling Canadian economy, prompted the Bank of Canada (BoC) to cut interest rates on December 11th for the fifth consecutive time. In the U.S., the Federal Reserve is also expected to cut its policy rates when it meets on December 17th, although investors have tempered their expectations given resilient economic data. Below, we briefly review 2024 and look ahead to 2025.
This year has been another strong one for equity markets. Global stocks are up over 20% so far, led by North American equities. International and emerging markets have also seen above-average returns, though less pronounced. Market gains were led by the artificial intelligence theme, as investors anticipate significant positive changes in productivity and growth. The U.S. mega-cap “tech” stocks, commonly referred to as the “Magnificent 7”, have been the most direct beneficiaries, accounting for roughly half of U.S. equity market returns this year.
In Canada, the technology sector has similarly had strong performance. The gold sector was a standout as emerging market central banks continued to purchase gold to diversify their reserves, driving prices to new highs. Notably, the financial sector contributed the most to the Canadian stock market’s strong returns. While performance varied among individual banks, the group performed well as recession fears eased and businesses and households demonstrated greater resilience under the weight of high interest rates.
This year marked a shift in global central bank policies, with many cutting interest rates. The policy shift has fueled hope of an improved economic and earnings story in 2025 and has led to a broadening in the range of stocks and sectors participating in the market rally. The bond market experienced less volatility, with yields fluctuating within a narrow range as investors gained confidence in the outlook for inflation and growth. This stability led to solid returns across both government and corporate bonds.
Looking ahead to 2025, please see our Global Insight 2025 Outlook. Stock valuations, particularly in the U.S. equity market, are relatively high following another year of strong performance. Nevertheless, valuations are supported by healthy earnings growth and solid economic projections for both 2025 and 2026. In addition, a more supportive policy backdrop could allow valuations to move higher still. In Canada, earnings growth is expected to support stock valuations that are more conservative, although some uncertainty tied to the impact of potential U.S. tariffs remains. For bonds, opportunities are less compelling than they were a year ago, given current lower yields and narrower credit spreads. Investors need to adopt a more selective approach to bonds.
Overall, we are happy with the contributions that both stock and bond markets have made to our client portfolios this year. While we see reasons to be optimistic about the year ahead, we are mindful that investor sentiment has become more positive and stock prices already reflect the expectation of higher economic and earnings growth next year. Markets are vulnerable to economic and earnings developments falling short of expectations. We echo the sentiment expressed in our firm’s outlook: “watchful and cautious, but invested”.
We extend our warmest wishes to you and your loved ones this holiday season and look forward to supporting you in the year ahead.
If you have any questions, please do not hesitate to contact us.
Drew M. Pallett, LL.B.
Senior Portfolio Manager and Investment Advisor
RBC Dominion Securities
Email: drew.pallett@rbc.com