Approaching the one-month point of the U.S. federal government shutdown, the U.S. Federal Reserve (Fed) has been forced to make an interest rate decision with only partial visibility into the economy. In Canada, signs of weakness in pockets of the economy prompted the Bank of Canada (BoC) to follow suit with a rate reduction. Although trade tensions remain an overhang, equity markets have been demonstrating resilience, supported by strong corporate earnings and investor confidence in underlying fundamentals. We discuss these themes below.

Q3 Earnings

The U.S. earnings season is now in full swing, with nearly one-third of S&P 500 companies having reported this week. In the absence of much official U.S. data, corporate results and management commentary have become important tools in gauging the health of the economy. So far, earnings have generally exceeded expectations, with companies surpassing analysts’ estimates at rates above five- and ten-year averages.

With many global equity markets hovering near all-time highs, continued earnings delivery and constructive forward guidance will be key to sustaining upward momentum. Over the past week, investors have focused closely on Big Tech earnings, tracking their capital spending trends and assessing the path forward for AI-related investments. In most instances, the results have been perceived favourably, lending support to equity markets. Tech companies have announced continuing investment, collaboration and innovation.

Interest Rate Cuts

The Federal Reserve decided to trim its benchmark rate by 0.25% this week amid the reduced economic visibility caused by the government shutdown. With many official reports unavailable, policymakers relied on alternative data sources and commentary from the business sector to gauge inflation dynamics and consumer demand. The September inflation report, which was released as an exception due to its role in determining Social Security adjustments, provided one of the few clear data points. While inflation remained above the Fed’s 2% goal, the softer-than-expected reading and steady underlying trends gave officials confidence to ease policy.

Fed Chair Powell cautioned, however, that continued data disruptions could complicate future decisions. He noted that another rate cut in December “is not a foregone conclusion,” stressing the Fed’s need to balance “upside risks to inflation and downside risks to employment” amid an increasingly uncertain data environment.

In Canada, the Bank of Canada also lowered rates by 0.25%. Easing business inflation expectations, the removal of retaliatory tariffs, and a tepid labour market provided scope to cut for a second consecutive meeting, despite a modest uptick in headline inflation. The Bank of Canada tempered expectations of more cuts in the months ahead. It noted that while persistent trade disruptions could cause structural scars to the economy, monetary policy would be less effective than government fiscal spending to provide counteracting stimulus.

Trade Frictions

Canada has once again drawn attention from the U.S. Administration, as President Trump proposed an additional 10% tariff on Canadian goods in response to a recent anti-tariff advertisement. While details remain unclear, most Canadian exports continue to benefit from USMCA protections, helping cushion the overall impact. Nonetheless, ongoing sectoral tariffs’, particularly in steel, aluminum, and autos, continue to weigh on industrial activity and may constrain growth prospects. With USMCA renegotiations on the horizon in 2026, we will be pay close attention to how the renewed friction evolves.

In contrast, there was a more positive turn in U.S.–China relations. The in-person meeting between Presidents Trump and Xi Jinping in South Korea this week delivered a temporary but constructive breakthrough. The two countries have agreed to suspend export controls on rare earth minerals and some semiconductors as part of a broader one-year trade truce that will also see the U.S. reduce fentanyl-related tariffs and China resume soybean purchases. While the agreement helps reduce the immediate risk of further tariff escalation, the short duration of the truce means that policy uncertainty is likely to persist and could remain a source of market volatility.

Takeaway

With the corporate earnings season off to a broadly positive start and central banks moving to support growth, the foundation for cautious optimism in equity markets is intact. The combination of interest rate cuts and resilient earnings reinforces our view that maintaining an “invested but selective and cautious” stance remains appropriate. We continue to monitor the evolving policy landscape closely, balancing opportunity with vigilance in a still-uncertain environment.

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