The market noise through the first few months of this year has been considerable. The threat of tariffs, a surprise development in artificial intelligence, higher U.S. inflation, and a major shift in U.S. policy with respect to the war in Ukraine, international relations and numerous domestic matters are just a few of the challenges that investors have been digesting. Global equity markets have been resilient in the face of these issues and are higher year-to-date. Government bond yields are near their levels at the start of the year. The beleaguered Canadian dollar has strengthened recently. We discuss these issues below.

Tariffs continue to be on everyone’s mind. Despite numerous threats, the U.S. government has undertaken one definitive action so far: an additional 10% tax on Chinese imports. Nevertheless, the risk of new tariffs remains. The U.S. is expected to revisit its plans for universal tariffs on Mexico and Canada in early March, it is planning tariffs on all steel and aluminum imports later in March, and President Trump has voiced his intention to bring Europe into the crosshairs in the not-too-distant future. Thus far, however, investment markets have posited that the worst-case scenario has already been avoided: wide-ranging tariffs that were threatened to be enacted over a month ago. Instead, we have seen the emergence of delays, extensions, targeted tariffs, and exceptions. These appear to be the most probable U.S. strategies going forward. A nuanced application of tariffs is consistent with the approach taken during President Trump’s first term in office.

Artificial Intelligence has made notable gains recently. DeepSeek, a Chinese company, unveiled an AI model with impressive performance relative to leading models developed in the U.S. It quickly surpassed OpenAI’s ChaptGPT as the most downloaded application on Apple’s App Store. DeepSeek suggested that it was able to develop its AI model at a fraction of the cost of U.S. models. It had succeeded in doing so despite not having access some of the world’s most powerful chips (due to U.S. government restrictions). DeepSeek’s development serves as a reminder that innovation is alive and well in China. It also raised more questions around the significant amounts of capital that continue to be deployed by U.S. technology firms. This led to some volatility among technology stocks. Given the elevated valuations of technology stocks and the high concentration of the technology sector within the U.S. market, developments in AI will remain very important factors for the U.S. stock market.

The U.S. inflation reading for the month of January was higher than expected. The breadth of inflationary pressures also widened, suggesting that a broader range of goods and services are experiencing some pricing pressures. While January’s numbers represent just one month of data, investors will be watching to see if the pressures persist over the months to come. This concern was shared by members of the U.S. Federal Reserve who suggested that they are reluctant to lower interest rates further until they see further definitive further progress in taming inflation.

Global equities have performed reasonably well year-to-date despite the above-noted headlines. This suggests that investors are looking past the noise and continue to have confidence in corporate earnings growth potential over the next few years. In our view, however, investors should not be complacent in the face of the market’s apparent short-term resilience. We continue to watch for additional signs that would support the market’s strength. One such indicator is rising market breadth, which would suggest that an increasing number of stocks are making new highs. Should this occur, it would help to confirm that the current bull market for stocks will continue to be on solid footing.

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