DIARY OF A PORTFOLIO MANAGER
August 8th, 2025
“Everybody's workin' for the weekend
Everybody wants a new romance
Everybody's goin' off the deep end
Everybody needs a second chance"
Working for the Weekend - Loverboy
Good afternoon,
Loverboy was brought up recently as my friend see them at the new Hard Rock Hotel next month. Seems like a decent outing. I saw them last year in Toronto. Maybe I can get them to sign my cassette tape from 1979?
The Degenerate Economy
Have you heard about the “Degenerate Economy”? It’s a subset of companies that some people may not want to admit to owning. Think of things like gambling, sports betting, crypto, meme stocks, etc. Interestingly, these stocks have outperformed the broad indices this year. Draft Kings, Roblox, Robin Hood, Coinbase would be some examples of these companies. Tobacco and gold have also steadily outpaced the markets this year.
Also, our quantitative group produces a ‘bottom’ list meaning that they highlight the least attractive stocks based on fundamentals. The idea of this list is to highlight things you want to sell if you own or ‘short’ them if are so inclined betting on them to go down. The Canadian bottom list is up more than double the TSX 60 this past quarter and the US list is up 4 times more than the S&P 500 over same time frame. 4 times more! This means that the companies that rank the worst from a fundamental perspective have dominated. This can’t last but make for some wild times in the markets. This is quite rare but, based on when I have seen it happen before, caution is warranted. Any thoughts on this?
As I’ve highlighted recently, this summer has been far from quiet. Markets remain sensitive to a steady flow of headlines, many of them tied to evolving trade developments, which continue to shape investor sentiment. The latest is a tariff on gold announced today. Meanwhile, the second-quarter earnings season remains in full swing.
Q2 earnings
The second quarter earnings season is well underway, with 122 S&P 500 companies reporting this week alone. Overall, results have generally exceeded expectations, helping to lift the projected earnings growth rate for the index. Much of this momentum has been driven by strong performances from several of the “Magnificent 7” large-cap tech companies, along with notable contributions from the Financials sector.
Despite the relatively solid results so far, management commentary has been somewhat more mixed, with some firms striking a cautious tone. Sectoral differences have been shaped by a range of factors, including trade policy, consumer trends, foreign exchange fluctuations and shifting demand patterns. As Federal Reserve Chair Jay Powell recently noted, there’s still “a long way to go” in fully understanding how tariff changes may influence inflation, economic growth and demand, particularly as we look ahead to 2026.
Trade developments
Trade policy developments remain fluid. Over the past two weeks, we’ve seen a combination of tariff escalations and constructive trade agreements. On the escalation front, the U.S. reinstated reciprocal tariffs ranging from 10% to 50% on dozens of countries, marking a pivot toward a more aggressive, country-specific trade approach.
For Canada, duties on select Canadian exports into the U.S. were raised from 25% to 35%. However, Canada reaffirmed the USMCA continues to shield the vast majority of its exports and signaled ongoing negotiations. Meanwhile, tensions intensified between the U.S. and India, where the U.S. administration is preparing to impose an additional 25% tariff in response to India’s continued purchases of Russian oil, part of broader efforts to increase pressure on Moscow to resolve the war in Ukraine.
At the same time, the U.S. had announced a series of new bilateral trade agreements with key partners―including the European Union, Japan, and South Korea―that clarified tariff schedules and improved mutual market access. Additionally, ongoing U.S.-China negotiations suggest a potential extension of the current tariff truce is forthcoming, while Mexico also secured a 90-day reprieve from new U.S. tariffs, allowing more time for discussions on border security and trade-related issues. Lastly, the U.S. unveiled plans for a 100% tariff on imported semiconductors―though the impact may be limited in scope, given significant exemptions for companies with existing U.S. operations or plans to invest in U.S. production. Together, these announcements have helped ease some investor concerns that contributed to renewed optimism in global markets.
Macro developments
In the U.S., recent data has weakened the narrative of economic resilience. The July jobs report came in well below expectations, with downward revisions to prior months adding to concerns about a softening labour market. Compounding the picture, a key activity indicator for the U.S. services sector―accounting for roughly two-thirds of the economy―unexpectedly stalled in July. In response, markets are increasingly anticipating a rate cut from the Federal Reserve, potentially as early as next month, policymakers held rates steady at their most recent meeting in late July.
Closer to home, the Bank of Canada kept its policy rate unchanged at 2.75% for the third consecutive meeting. Policymakers are likely to maintain a cautious stance in the near term, as they navigate a delicate balance between a recent pickup in core inflation measures and signs of softening economic activity, all against a backdrop of persistent global trade uncertainty.
Takeaway
On balance, strong corporate earnings results to date, alongside a series of constructive trade developments, have provided a foundation for cautious optimism. Nevertheless, with equity markets trading near all-time highs and elevated valuations, we remain mindful that expectations have risen meaningfully. While corporate fundamentals remain broadly supportive, this heightened bar of expectations could leave markets relatively more sensitive to negative surprises in the near term.
Should you have any questions, free feel to reach out.
