Insights and Strategies
Are we past peak 'shock and awe'?
Macro Highlights for April
- The Canadian economy is estimated to have grown 1.5% in 1Q25, partly helped by exports as U.S. companies rushed to import goods ahead of tariffs coming into effect. Expectations are for growth to stall to effectively zero in 2Q25 as the export rush normalizes, the effect of tariffs start to kick in, and overall uncertainty in the economy puts a damper on decision-making, growth plans, and hiring commitments.
- U.S. GDP contracted for the first time in three years, by 0.3% (annualized) in 1Q25, as tariffs start to impact hard data. The biggest detractor in the quarter was the rush of imports to front-run tariffs, which we would expect to normalize going forward. Job growth was a positive surprise at 177k for April. Consumer spending is still positive, but weakening. Soft data continues to flash warning signs for the U.S. economy. The University of Michigan Consumer Sentiment Index dropped another 8% in April, to its fourth lowest level since 1952. Concerns about U.S. tariffs slowing the economy and increasing the possibility of a resurgence in inflation are becoming more widespread. Our U.S. economics team has reduced its GDP growth forecast for 2025 from 2.4% to only 1.0% growth.
- Inflation has continued to be sticky above 2% targets, but with some concerns that tariffs could put more upward pressure, more so in the U.S. than in Canada. Both central banks are expected to continue lowering rates through the remainder of 2025, although cautiously.
Financial Markets in April
- In April, the TSX Composite, Canada's main stock market index, recorded a -0.3% price return and a -0.1% total return, with an intra-month drawdown of 11.1%. Meanwhile, the S&P 500, after experiencing a 12.1% decline following “Liberation Day” and significant volatility, posted a -0.8% price return and a -0.7% total return, all in local currency.
- The forward-looking EPS for the S&P 500 in 1Q25 is currently US$64, down from US$66 in 4Q24, but up approximately 12% from US$57 in 1Q24. Although the 1Q25 earnings season is still unfolding (with 364 out of 500 companies having reported), if this figure holds, it will reaffirm the solid fundamentals of U.S. large-cap corporations, implying some resilience in weathering the tariff storm.
- Within the TSX Composite, Consumer Staples and Utilities, both defensive sectors, were the top performers in April. Despite temporary tariff relief, the effects of tariffs are continuing to unfold, and with a slowing U.S. economy, Canada will face additional economic pressures. Thus, the market may continue to favour defensive sectors in the near term.
Upcoming
- With the Canadian federal election in the rear-view mirror, all eyes will turn to the tone following conversations and live meetings between President Trump and Prime Minister Mark Carney. Investors will look for clues as to how quickly and within what framework a new stable environment between Canada and the U.S. can be established regarding trade and border security, including the evolution of rhetoric about Canada becoming part of the U.S.
- The next U.S. Federal Reserve rate decision will be on May 7. While expectations for a rate cut are low, what will be most interesting will be the comments on U.S. economic growth and how tariffs are impacting the outlook. Our U.S. team is forecasting 2-3 cuts this year, from the current 4.5% level, with the first cut on June 18.
- We are now into 1Q25 earnings season and are watching for forward-looking commentary and guidance from companies that might be most impacted by rising input costs due to Canadian retaliatory tariffs, and those with export markets that might be impacted by U.S. tariffs. With a weaker U.S. economy and margin compression from higher costs to U.S. companies, our U.S. team has reduced its S&P 500 EPS forecast to US$250-255, from US$265. Our S&P 500 target has similarly been reduced to 5,800, from 6,375. We will have a better idea about the longevity of these tariffs over the next days and weeks, although given the U.S. administration’s goals of generating extra government revenue and enticing companies to commit to multi-year projects to move manufacturing operations, the initial intent seems to be that these will be effectively permanent, but with room for negotiation as to the rates. We will similarly weigh adjustments to our TSX target as the longevity and breadth of tariffs become more certain, with consideration to the potential impact to the Canadian economy from a slowing U.S. economy, and quarterly earnings results and guidance. For now, however, our TSX Composite year-end target has remained unchanged at 26,300.