Investment Commentary Summer 2025

Macro Highlights

The Canadian economy is softening, but not weakening dramatically, after strong 2.2% growth in 1Q25, which was partly attributed to a rush of exports to the U.S. in advance of tariffs being implemented. Canadian retail sales started off 2Q25 well in April, up 0.3% from March, but preliminary numbers for May suggest a 1.1% decline month over month, and more weakening into 2H25 which means we are not out of the woods from experiencing a soft landing. While sentiment and soft data in the U.S. suggests an economic slowdown is coming, hard data has shown that the economy and consumer spending remain resilient, unemployment remains low and inflation pressures remain subdued, although CPI remains stubbornly above the 2% target. Tariffs are only now starting to trickle into consumer prices, and corporations have been slowing down or pausing hiring given the uncertainty, while job seekers have been spending more time trying to find employment. We see unemployment growth to be the most likely catalyst to prompt the Fed to resume rate cuts, which the market is expecting to happen in September. Around the world, investors, economists, and central bankers are looking for clarity on how U.S. tariffs, which are still evolving, will ultimately impact economic growth, employment, corporate profitability, and other metrics. Although we thought we were making progress on the trade front Trump recently issued a personalized form letter to Prime Minister Carney, letting him know that Canada will be subjected to a 35% tariff on all Canada goods starting August 1st. This was a surprise for two reasons. First, Canada was not included in the April 2 tariffs that these letters were supposed to clarify. Second, the U.S. and Canada were supposedly in talks towards a new trade and security deal to be announced July 21. While headlines like these tend to create anxiety among Canadians, and likely a large number of U.S. businesses that rely on Canadian goods in their supply chains, investors seem to be shrugging off these threats more and more. Investors seem to recognize these as simply negotiating tactics. We expect to see some clarity over the next few days however it’s notable that the other letters that Trump has sent out recently reinforce tariff rates that are not that much different from the April 2 tariff rates.

Financial Markets

The TSX Composite has hit a new all-time high in June and, at time of writing, has returned year 9.5% year-to-date. Similarly, the S&P 500 has hit all time highs and has returned approx. 7% year to date. In the second quarter of 2025, the TSX Composite delivered an 8.5% total return, trailing the S&P 500, which gained 10.9% in total return, all in local currency terms. However, when measured in a common currency, the TSX Composite outperformed the S&P 500, due to recent U.S. dollar weakness, driven by weakening confidence in the U.S. economy and markets. In the TSX Composite, cyclical sectors such as Information Technology, Consumer Discretionary, and Financials outperformed, supported by Canada’s economy holding up better than expected. Materials also gained, due to a heavy weighting in gold, following Israel’s strike on Iran. Meanwhile, defensive sectors like Consumer Staples and Utilities continued to lag. In the S&P 500, Information Technology and Communication Services benefited from renewed optimism around A.I., while defensive sectors such as Consumer Staples and Utilities underperformed. Real Estate also lagged, weighed down by elevated policy rates. The Bank of Canada held its policy rate at 2.75% for a second consecutive meeting in June, maintaining a cautious approach amid persistent economic uncertainty and evolving inflation dynamics. According to the Bank’s Summary of Deliberations, three key considerations shaped the June decision: elevated uncertainty, a softer economic backdrop, and a recent uptick in underlying inflation. While the economy continues to show signs of strain, particularly in the labour market, the Governing Council expressed concern that cost pressures stemming from trade disruptions could keep inflation elevated for longer than previously expected.

What’s Next

We will soon be kicking off 2Q25 earnings season and companies should be giving more details on how tariffs have already affected their costs or will impact prices or cost increases through the remainder of the year and into 2026. If a slowing economy and more reluctant consumers limit the opportunity for businesses to increase prices to pass on tariff-induced costs, we could expect pressure on profits and/or more significant labour impacts, which could then increase unemployment rates. We are expecting weakening of economic data, in both Canada and the U.S., to prompt both central banks to reduce their policy interest rates. This would only occur if the impact of tariffs is more fully understood, and that inflation, other than perhaps a one-time price level adjustment, is deemed to be under control and steady around the 2% target.

As we pass the half-way mark of 2025, we see that financial markets have become more accustomed to President Trump’s chaotic announcements (TACO – Trump always chickens out) and has mostly discounted the most severe scenarios for a world in which the U.S. becomes more transactional and isolationist, with a relatively permanent tariff regime in the 15% range. Canada has also significantly shifted on multiple fronts, at least with stated intentions to invest in and fast-track energy, mining, and defense spending initiatives. If we continue to see follow-through on these promises in Canada and a favorable outcome from negotiations with the U.S. on trade and security, we could see Canada coming through this uncertainty in a relatively good position, in both North America and globally. We are certainly far from being immune to further announcements, threats, and initiatives by the U.S. administration, and we will still likely see at least mild contraction in the Canadian economy before the year is out, with certain industries, such as automotive, steel and aluminum, facing considerable pressures. We however do expect the markets on both sides of the border delivering positive year end returns if progress is made on the tariff front.

How we are positioned.

We continue to maintain a slight overweight to fixed income as we purchased bonds at much higher yields then today and they have yet to mature. We maintained our exposure to high yield securities and slightly increased our exposure to Canadian growth securities. We maintain our philosophy that good quality securities will provide better risk adjusted long term growth and that asset allocation is the key to investment success. We have and always will have an active asset allocation process.

We hope you are enjoying the sunshine which was late arriving this year and your favorite summer activities. As always please do not hesitate to contact any one of us with any questions or concerns.

Regards,

Linda Shick
Senior Portfolio Manager & Senior Wealth Advisor
T: 416-777-7109
linda.shick@raymondjames.ca

David J. Angas, CEA
Senior Financial Advisor, Certified Executor Advisor
T: 416-777-7110
david.angas@raymondjames.ca

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Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Family Wealth Counsel Advisory Group, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.