Waiting for clarity on reciprocal tariffs and a Canada-U.S. trade/security deal

Insights and Strategies

Macro Highlights for June

• 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 m/m, and more weakening into 2H25, which reinforces our forecast of two Bank of Canada (BoC) rate cuts before the end of the year.
• 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 actually declined in June), 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. Decision-making seems to mostly be on pause in the meantime, although July promises to provide some indications of the path forward as the U.S. continues to push through its budget bill, and we expect to see more progress on U.S. trade deals, specifically with Canada around July 21, and as the delay in the implementation of reciprocal tariffs with dozens of other countries ends on July 9.

Financial Markets in June

• The TSX Composite hit a new all-time high in June, and was up 2.6% by price and 2.9% total return in the month, for year-to-date (YTD) returns of 8.6% and 10.2%, respectively. Similarly, the S&P 500 gained 5.0% by price and 5.1% total return in June, and YTD was up 5.5% and 6.2% respectively, in local currency.
• After a chaotic first half to the year, our U.S. team has slightly increased its year-end target on the S&P 500, from 5,800 to 5,875, based on 2025 earnings of US$255, which is below consensus of US$263. That target is still lower than our pre-tariff target of 6,375 set in January, which our U.S. team now expects to be achieved mid-2026.
• In Canada, we have maintained our 26,300 year-end target on the TSX Composite index from the start of the year, although Canada’s out-performance in 1H25, has put the index above 26,800 currently. President Trump’s outburst about the Digital Services Tax and his apparent refocusing on Supply Management in Canada is a reminder that a favourable outcome from current trade/security negotiations is by no means a slam dunk, and that we could still face pressure and surprises through 2H25. While we still believe that Canada is relatively well positioned with the U.S. despite the potential for some economic weakness in 2Q25 and 3Q25, and pain in certain tariff-impacted industries, we will more thoroughly review our year-end target once we gain more insights from July tariff announcements and as we watch quarterly corporate earnings updates.

Upcoming

• We are quickly approaching the July 9 date, when Liberation Day tariffs, above the 10% universal rate, are expected to be re-imposed, after being paused for 90 days to enable countries to negotiate lower rates. Expect a flurry of new announcements and deals in principle, with lots of details to be sorted out later. Although Canada was not subject to the Liberation Day tariffs, Prime Minister Carney announced at the G7 Summit, that a new deal on trade and security between Canada and the U.S. could be expected within 30 days, which sets expectations of an announcement by July 21.
• 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 by 50 bps before the end of the year, with the U.S. moving down to 4.00% and Canada moving to 2.25%. This also assumes that 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.