We hope you’re having a wonderful summer!

The first half of 2025 is over, and the major investment story that Canadian investors will remember is the soap operatic trade discussions between the U.S., Canada and the rest of world.

Q2 2025 began with equity indexes plunging on the heels of the April 2 U.S. announcement of sweeping tariffs on almost every trading partner worldwide. Volatility – as measured by the Vix index – soared to its second-highest mark since the levels reached during the COVID period.

At one point in mid-April, the year-to-date return of a geographically diversified growth portfolio was around –5%.

The quarter also delivered an array of geopolitical jolts, including a short but potentially devastating conflict between Israel and Iran. In this turbulent environment, gold rose sharply in early-April and hit a record high in mid-June before closing Q2 slightly off its peak. The sudden onset of a major Middle East conflict caused a sharp, but brief, spike in the oil prices and by Q2’s end, oil was below where it began the three-month period.

Yet, stock markets staged a remarkably rapid, strong recovery from the April selloff as the quarter unfolded, with major indexes surging to record highs by the end of June. Resilient corporate earnings supported the optimistic outlook, and U.S. investors also noted a calmer tone regarding the crucial U.S./China trade negotiations; also, U.S. inflation remained steady near the Federal Reserve’s 2% target despite the tariff turbulence. As of June 30th, the year-to-date return of a growth-oriented portfolio is around 5%.

The past six months have reinforced the importance of diversification, cross-border awareness, and careful portfolio rebalancing. Below are the major stories that have defined the Canadian investment landscape thus far in 2025.

 

Trade Wars and U.S. market volatility

The S&P 500 (key U.S. index) entered 2025 with a price value of 5,903. With strong momentum carried over from 2024, it rose 4% to end at 6,144 February 18. Over the next 6 weeks, the prospect of economically damaging tariffs began to grip markets, and the S&P 500 fell 19% to 4,982. “Liberation Day” on April 2 represented Peak Tariff Fear as markets, investors, companies, and policymakers around the globe confronted the immense economic threat of 60-to-70% effective tariff rates on exports to the world’s biggest economy.

 

 

 

Since then, the average duty for imports into the United States has fallen significantly —now to only approximately 17%, a rate last seen a century ago and one far steeper than the prevailing average of 2.5% that had been in place for the past two decades. Since early April, the S&P 500 has risen 24%, closing at 6,202 on June 30th, for a year-to-date return of 5.5%.

Trade tensions remain elevated despite the August 1 tariff deadline passing. Tariff collection is now expected to begin August 7, though negotiations are ongoing and could still result in a rollback. The uncertainty around implementation and potential escalation continues to weigh on market sentiment and the near-term economic outlook.

Conclusion: the current U.S. administration is a major wild card for market performance. Expect shocking headlines, surprise policy announcements, and quick reversals in market direction.

 

Canadian and International Market outperformance – The importance of diversification

Against a backdrop of macroeconomic volatility, geopolitical risk, equity concentration risk, and fixed-income yields, the case for diversification remains stronger than ever.

 

 

As of June 30th, the MSCI ACWI (World index) has returned 9.1% this year, but those gains have been primarily driven by equities outside of the U.S. The MSCI ACWI ex USA Index is up by an impressive 16.0% versus 5.5% for the S&P 500. Even the TSX has posted an 8.6% return thus far in 2025.

 

 

Since the pandemic, central banks have shown a growing tendency to chart their own course rather than mirror the U.S. Federal Reserve’s monetary policy decisions. Central banks in Europe and Canada are prioritizing economic growth, whereas the Fed remains more concentrated on tackling inflation.

Conclusion: The golden era of expansive global trade and seamless international commerce seems to have passed, which could lead to international markets behaving less uniformly going forward.

 

Markets pull back. Markets underperform. Markets recover.

The only truth about markets is that they rise and decline, and that periods of market expansion exceed periods of market contraction.  The market lows seen in March and April of this year serve as a good reminder that markets are volatile and sentiment can change quickly.  The rapid recovery, and setting of new all-time highs that has occurred since then reinforce these themes on the upside.

Our risk tolerance will naturally be influenced by the current political backdrop, and there is room for tactical portfolio adjustments within a market cycle.  However, it’s important to follow the long-term plan.  Your portfolio is constructed to align with your life stage (working vs. retired, or accumulation vs. decumulation), investment timeline, cash flow needs, and other objectives. Reallocating to safety during a market decline will ensure that you absorb most or all of the downside, and miss out of all of the subsequent upside, which will erode your long-term return.

 

 

 

Market pullbacks are incredibly common, even in strong performing years.  Since 1980, the S&P 500 has dropped 5% or more in nearly every calendar year (93%) and 10% or more in almost half of those years (47%).

 

 

Conclusion: Not every market dip requires a deep reassessment of the portfolio. Often, doing nothing and letting markets recover is the best course of action to take.

 

Factoring in all the available data to-date, the base case is for below average growth, not a recession

Looking ahead, economists surveyed by Bloomberg generally expect GDP growth to lose momentum, with modest projections for 2025 and 2026. Trade tariffs – mostly originating from the U.S. – are expected to contribute to heightened uncertainty, which could in turn weigh on economic activity. For example, Canada’s most recent monthly GDP report already shows signs of strain in the manufacturing sector due to the lingering threat of tariffs. As a result, the risk of recession persists, though it is not currently the most likely scenario.

 

Here are the key drivers of returns to watch out for this year:

Global Disinflation + Dovish Pivots

• U.S. core PCE inflation has fallen below 2.5% year-over-year — its lowest level in more than two years — strengthening the argument for a possible rate cut in Q4.
• Central banks in Canada, Europe, and emerging Asia have already begun easing, helping to drive multiple expansion and encourage a shift toward risk assets

Earnings Reacceleration

• Forward EPS estimates for global equities have been revised up by ~4% since March.
• U.S. tech, European industrials, and Japanese financials are leading revisions.

Cyclical Leadership Rotation

• The market is beginning to pivot from narrow AI-led rallies to cyclicals, industrials, and small/mid-cap exposure, particularly outside the U.S.
• However, the Magnificent 7 still account for ~40% of S&P 500 YTD gains.

Valuations

Market / Index	Forward P/E	Notes
S&P 500	20.3x	Premium to 10-yr average; justified by margin strength
MSCI Europe	13.4x	Discounted; pricing in mild recovery
TOPIX (Japan)	15.1x	Re-rated on BoJ reform and better ROE
MSCI EM	12.2x	Attractive, but dependent on China policy execution

Relative Opportunity

• Equity Risk Premiums (ERP) have declined but remain positive vs. Investment grade fixed income.
• Volatility remains suppressed, but geopolitical risks (U.S. election, China-Taiwan tensions) warrant tactical hedging strategies.
• The MSCI EAFE Index is currently trading at ~13.4x forward earnings versus ~20x for the S&P 500, representing a ~30% valuation discount – one of the widest spreads of the past two decades.
• Canadian equities, while attractive for income, are concentrated: ~55% of the S&P/TSX Composite is in Financials and Energy, compared to less than 20% in the MSCI ACWI.

Secular Themes Driving Earnings Growth

• AI and Digital Infrastructure: Global investment in AI-related hardware and software is projected to grow at a compound annual rate of over 20% through 2030, with the majority of the supply chain located outside of Canada.
• Energy Demand: More than $4 trillion USD in global energy investment is expected over the next decade, largely focused in Europe and Asia.
• Emerging Market Consumption: By 2030, emerging markets are projected to account for over 60% of global middle-class spending, presenting long-term growth opportunities that go beyond what Canadian markets can offer.

Global equities could trend higher through year-end, particularly if:

• The U.S. follows through with expected interest rate cuts|
• Corporate earnings continue to exceed expectations
• Geopolitical tensions remain relatively stable

However, several risks could disrupt this outlook, including:

• Policy errors by central banks or governments
• An overreliance on the AI sector for market performance
• Escalation of geopolitical conflicts

Geopolitics and Volatility are here to stay, and how to address it

As of May, tariff announcements were occurring with striking frequency — on average every 1.6 to three days. Similarly, a flood of Presidential executive orders created periods of intense policy volatility. The pace & unpredictability of change calls for a reassessment of equity risk, as rapid shifts in major policy — particularly on trade — can have lasting implications not only for the U.S. economy, but for global markets as well. It’s likely we haven’t seen the end of trade disputes under this administration; in fact, tensions could intensify further, especially now that legal challenges to the initial “emergency” tariffs are progressing through the courts, with some cases potentially headed to the U.S. Supreme Court for final resolution.

With that context in mind, we outline three basic ways you can address market volatility:

1. Reducing U.S. Exposure in Favour of International Equities: While U.S. markets rebounded strongly off their April lows—driven by the continued outperformance of mega-cap tech and the resurgence of the “Buy America Again” trend, the opportunity set is broadening beyond U.S. borders. Earnings momentum in Europe, Australasia, and certain Emerging Markets (EAFE and EM) suggests these regions are closing the gap on U.S. exceptionalism. Structural global shifts support a move toward increasing core exposure outside the U.S.

2. Low-Volatility and Dividend funds: Market volatility remains elevated and is unlikely to subside in the near term. Defensive positioning through low-volatility strategies continues to offer downside protection. Earnings growth expectations have been revised downward—from an estimated 15% at the start of 2025 to now under 10% – reflecting diminished global trade activity, weaker manufacturing output, and elevated recession risk. Against this backdrop, high-quality dividend payers with strong balance sheets and reliable cash flow are likely to outperform. These names tend to offer stability during downturns and may serve as foundational holdings in income-oriented portfolios.

3. Fixed-Income holdings: The current case for bonds in a portfolio is stronger than it has been in years, driven by higher yields, stabilizing interest rates, and renewed demand for diversification. After a decade of ultra-low interest rates, bond yields are now meaningfully positive. Investors can earn 4–5%+ on high-quality government and corporate bonds, providing a decent return without taking equity-level risk.

As with all prior periods of market volatility and uncertainty, the prudent approach is to maintain a long-term perspective – understand one’s own risk tolerance and invest accordingly. Uncertainty can provide opportunities to add value. Stay focused on long-term investment goals and be diversified across regions and assets classes.

Please feel free to reach out with questions specific to your portfolio. We’d be happy to discuss your individual situation.

 

Sources: Capital Group, JP Morgan, RBC GAM