4Q 2025 — Rotation and Resilience

The fourth quarter closed out another resilient year for risk assets. There were some notable headwinds to navigate, including the longest US government shutdown in history, weaker hiring trends, and sticky inflation, yet investors continued to look past these potential hurdles. While rallies in the stock and bond markets slowed in the final three months, the gains were good enough to end the year on a positive note. Meanwhile, commodities were mixed, requiring a more selective approach. Economically sensitive commodities such as crude oil struggled during the quarter, while the precious and industrial metals soared. Overall, the fourth quarter was a perfect illustration of the benefits of a diversified portfolio, as exposure to areas like gold helped during a somewhat cooler period for the stock and bond markets.

Canadian Equities:

The TSX's gained 31.68% in 2025 with the index posting its strongest annual performance since 2009, marking three straight years of gains. The stellar performance has been driven by soaring gold and silver prices amid heightened geopolitical tensions, which have nearly doubled miners' shares, and advances in heavyweight financial stocks. The sectors collectively represent about two-thirds of the index's weight. Hard Assets Turning Up, Fiscal Spending Turning On Canada’s 2025 budget sets the stage for a broad hard-asset up-cycle, with fiscal programs channeled into materials, energy, and industrials. These sectors may see multiple expansion ahead of earnings improvements as investment accelerates. Critical minerals, energy exports, nuclear and clean power, data centre demand, and major infrastructure initiatives all act as structural tailwinds. Industrials benefit from tariff-response funds, tax reductions, and defense procurement reform, while banks gain from improved loan activity. Together, these sectors support our 2026 TSX Composite target of 34,000 and EPS forecast of $1,890, although follow-through of federal promises will be important.

Canadian Macro

Canada’s economic outlook for 2026 points to a softer start, with labour market concerns and ongoing uncertainty around Canada–U.S. trade relations weighing on near-term growth. However, the upcoming USMCA renegotiation offers hope for greater clarity and a potentially favorable outcome for Canada. As fiscal measures from Budget 2025 begin to take effect and trade policy uncertainty eases, we expect economic momentum to strengthen modestly in the second half of 2026, ending the year with moderate growth of 1.2%.

U.S. Equities:

Although indices south of the border posted marginal gains in the fourth quarter, the benchmark S&P 500 was 17.88% higher on the year. Constant rotations across the market kept a relatively high floor underneath prices even as stocks in hot themes such as artificial intelligence and quantum computing pulled back, other groups rallied to take their place as leaders. The result was good enough to leave the S&P 500 near its all-time high by quarter end. A key driver of equity strength was earnings durability. Corporate results generally exceeded expectations, particularly among companies with pricing power and strong balance sheets. Margins also proved more resilient than anticipated. Despite inflation rates that remain higher than consumers and businesses would prefer, easing input costs and productivity gains from automation and artificial intelligence adoption helped keep margins from tightening too much. Valuations do remain elevated by historical standards, but investors appear willing to accept these higher multiples given consistent earnings trends, the absence of a clear recession signal, and falling rates in safer alternatives such as money market funds.

International Equities:

International equities, markets outside the U.S. and Canada, may see a moderation in performance after a strong 2025. Europe’s strong 2025 rally was driven by looser monetary and fiscal policy and a rebound from years of under-ownership, but with earnings momentum still weak and much of the gain fueled by multiple expansion, sustaining outperformance may be challenging. Limited exposure to high-growth tech sectors also remains a structural headwind. Japan offers stronger fundamentals but faces currency risk from a potentially stronger yen, given its significant overseas revenue exposure. We hold a more constructive view on emerging markets, supported by monetary easing and rising CAPEX in 2026. Even with more modest return prospects, maintaining international exposure remains valuable for diversification and reducing portfolio volatility.

Bonds

Fixed income markets largely benefited from the Federal Reserve continuing to ease monetary policy by cutting rates in the fourth quarter. However, intermediate and long-term rates remained firmer, likely due to inflation remaining sticky and growing concerns about the ballooning debt levels. The benchmark 10-Year U.S. Treasury yield was effectively flat from the end of September to the end of December, rising only slightly from 4.15% to 4.17%. As a result, the Morningstar Core U.S. Bond Index returned a minimal 0.97% during the quarter. The sideways move in longer-term rates continues a trend of the past couple of years, as the 10-Year yield has been stuck between 3.60% and 5% since October 2023. As the benchmark rates went sideways, so did credit spreads, reflecting minimal levels of concern about the financial conditions of companies despite some highprofile bankruptcies during the quarter.

Commodities

Commodity performance was mixed to finish 2025. Energy markets were volatile, with crude oil drifting lower amid concerns about global demand growth. West Texas Intermediate Oil prices even hit a multi-year low in December, falling to $55/barrel. At the same time, Natural Gas exploded higher before collapsing back down in response to shifting winter weather expectations and anticipated demand. Nat gas went from $3.30 at the end of September, all the way to $5.50 in early December, and back to $3.69 by year-end. The real story, however, was in the metals. Precious metals such as gold and silver delivered exceptionally strong performance as their prices skyrocketed in large part to the "debasement trade" driven by fear of a weaker U.S. dollar. Industrial metals like copper also enjoyed a positive quarter that was somewhat lost amid the excitement in gold and silver. Similarly, agricultural commodities did not receive much comparative attention as they were largely rangebound. Overall, commodities proved less a broad inflation hedge during Q4 and more an opportunity set highly dependent on asset-specific selection.

Conclusion

The fourth quarter reinforced that investors are constantly seeking out new attractive opportunities for their capital. Popular investment themes like artificial intelligence paused during the past three months, yet strong rallies in the precious metals and resurgent sectors like Health Care offered help to diversified portfolios. Equities once again demonstrated resilience and rotating leadership, bonds began to benefit from the prospect of policy normalization, and commodities reflected a more nuanced global growth backdrop. As markets head into 2026, attention will increasingly turn to the timing and pace of any additional rate cuts, the sustainability of corporate earnings, and the potential for fiscal spending to help boost a slowing economy during a midterm election year. While headwinds and hurdles remain, investors closed the year with renewed confidence that the financial system can overcome those risks.

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