Tariffs Continue to Dominate the Discussion While Markets Forge Ahead

Insights and Strategies

Macro Highlights forJuly

• Inflation in Canada rose slightly in June to 1.9%, as generally anticipated, although core measures remained around 3%. When combined with surprisingly good employment data, with 83k jobs added in June, dropping the unemployment rate from 7.0% to 6.9%, there was little incentive for the Bank of Canada (BoC) to reduce interest rates, which were maintained at 2.75% at the July 30 meeting. However, 40.8k job losses in July likely supports our expectation of softening that will prompt a rate cut in September.
• The Canadian economy is softening, but not weakening dramatically. After strong 2.2% (annualized) growth in 1Q25, which was partly attributed to a rush of exports to the U.S. in advance of tariffs being implemented, estimates are for a 1.5% contraction in 2Q25, followed by 1.0% growth in 2H25. The concerns are weighted towards slowing growth rather than of any uptick in inflation, which reinforces our forecast of two BoC rate cuts before the end of the year.
• U.S. employment data revisions indicated that the labour market has been weaker than previously thought for the last few months, creating an average of only 35k jobs per month over the last three months. This follows our thoughts about a weakening U.S. economy, but also raises the possibility of the U.S. Fed lowering its policy interest rate in September.

Financial Markets in July

• The TSX delivered a 1.5% price return and a 1.7% total return in July, boosting the year-to-date price return to 10.2% and 12.0%, respectively. Meanwhile, the S&P 500 posted a 2.2% return for both price and total returns during the month, with year-to-date price return of 7.8%, and total return of 8.6%, all in local currency.
• In the U.S., 2Q25 corporate earnings are coming in strong, with ~80% of S&P500 companies beating expectations so far, with y/y earnings growth of ~10%, versus last year. The Mag 7 and Tech remain key drivers in the quarter as AI enthusiasm and capex spending persists. Our U.S. team has a year-end target on the S&P 500 of 5,875, based on 2025 earnings of US$255, which is below consensus of US$263.
• In Canada, we are increasing our year-end target on the TSX Composite index to 28,600, from 26,300, as we gain more confidence in a positive outcome from Canada-U.S. trade and security talks and as the USMCA continues to shield the majority of Canada’s exports to the U.S. from the effect of tariffs, despite continued pain in certain sectors. We do expect more volatility in 2H25, as the pressure of trade tensions continue to build and impact the economy and corporate profitability, but that investors will increasingly be looking through to a more stable 2026.

Upcoming

• Overall tariff frameworks are becoming clearer for more countries, but we are still waiting for details on any trade and security deal between Canada and the U.S. Multiple deadlines have past, and even once we see whatever framework is established in this round of discussions, focus will quickly shift to the USMCA renegotiation in 2026, since that agreement has effectively shielded many Canadian products and industries from the broader tariff threats and announcements.
• Policy rate announcements from both the U.S. Fed and BoC are expected on September 17. With relatively contained inflation data and economic weakness showing, we are watching for easing from both countries.
• We remain constructive on equity markets through the end of the year and into 2026, but do expect noise and volatility through 2H25, specifically as companies adjust to tariffs coming into effect and make more permanent adjustments to pricing and costs structures.