The U.S. Federal government remains shut down. While the broader economic impact has historically been modest, the absence of official economic data releases during the standoff adds a layer of uncertainty. For now, investor attention is shifting to the Q3 earnings season, with renewed U.S.-China trade tensions adding to the uncertainty. We discuss these developments in more detail below.

Still Shutdown

The U.S. federal government shutdown has extended for over two weeks, with lawmakers still unable to agree on terms to pass a spending bill. The realistic compromises needed to achieve a consensus are unclear. In the past, U.S. government shutdowns have imposed only a temporary drag on growth, but the longer the shutdown persists, the greater the risk of more meaningful economic and market repercussions. With many federal workers furloughed and most government data releases on hold, the near-term economic outlook is increasingly difficult to assess.

Corporate Earnings

The quarterly reporting season kicked off this week. U.S. banks set a positive tone with strong trading and investment banking revenues. Given the absence of official U.S. economic data due to the government shutdown, company earnings and management commentary on the outlook are especially valuable for insights into economic trends and consumer demand. We will be closely watching guidance for the remainder of 2025 and into 2026, particularly around capital expenditure plans and how companies are navigating unpredictable U.S. trade policy and tariff-related costs.

Consensus estimates for the S&P 500 currently point to high-single digit year-over-year earnings growth in Q3, indicating that U.S. corporate earnings should continue to expand. Given elevated valuations that already reflect a favourable outlook, strong earnings delivery will be needed to sustain the existing uptrend in equity markets.

Canadian stocks have fared well year to date, benefiting from a rally in gold prices and solid performance from the banks. As Canadian companies begin reporting financial results, we will be monitoring commentary from export-reliant industries to gauge the impact of U.S. tariffs, and from consumer-dependent firms for insights into domestic spending trends. For the S&P/TSX Composite, consensus estimates are anticipating profit growth of about 9% this year and about 13% in 2026.

Trade Tensions

China-U.S. trade tensions have resurfaced after China’s recent decision to impose additional export controls on rare earths minerals. In response, the Trump administration has threatened "much higher" tariffs on China, potentially taking effect on November 1st. The latest escalations may be tactical posturing ahead of a bilateral meeting between Presidents Trump and Xi Jinping, which is still expected to take place in late-October.

The Trump administration has so far shown a reluctance to fully follow through on proposed tariff policies that have generated significant adverse market reactions. While markets initially reacted negatively to the headlines, they have since steadied, suggesting that investors are likely taking the view that a deal remains the most probable outcome. Nevertheless, elevated volatility may linger if talks falter or rhetoric intensifies.

Takeaway

With the U.S. government shutdown clouding the economic picture and renewed U.S.-China trade frictions contributing to uncertainty, we expect the Q3 earnings season to play a central role in providing an update on the economy and anchoring market sentiment. While some short-term volatility is possible, we believe "invested, but watchful" remains a sensible stance for portfolios as we continue to monitor developments on trade policy and corporate earnings.

 

Drew M. Pallett LL.B. 

Senior Portfolio Manager and Investment Advisor 

RBC Dominion Securities

Email: drew.pallett@rbc.com