Football is Back; We Can Stop Focusing on Politics Now.

 

 

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August’s heatwave extended to global equity markets. Good news outweighed bad and even negatives were spun into positives. However, if we are counting headlines, negatives dominated the month: a sour U.S. employment reading and mixed results on inflation; weak Canadian GDP on the back of damaged exports; the U.S. president engaging world leaders over ongoing conflicts; turmoil at the U.S. Federal Reserve; questions about the reliability of economic data (and subsequent firings); deployment of troops to U.S. cities and the South Caribbean; unconventional government stakes in private businesses and profit streams that look more like shakedowns than industrial policy; and, of course, more tariff rhetoric.

It’s understandably confusing in the face of all this to see equity markets soar. As usual, equity markets largely ignored the discouraging events because they had no clear and immediate impact on the fundamentals of economic growth, corporate earnings growth, and interest rates. In contrast, beyond the headlines, a positive story of brightening global growth, solid corporate earnings, and the prospect of lower borrowing costs is playing out.

Recession fears are fading in the rearview mirror. In fact, the slowdown may have already bottomed out back in Q1. Although the trade shocks disrupted forward momentum, most global economies have delivered better-than-expected economic growth for the first half of 2025. Weakness in headline numbers primarily stemmed from fluctuations in trade and inventory, which masked solid underlying domestic demand. Canada is a prime example. It was front-page news that, on an annualized basis, Canada’s economy contracted 1.6% in Q2, deeper than expected. But a closer look revealed household spending jumped 4.5% and residential investment rose 6.3%. Final domestic demand climbed a healthy 3.5%. Economic activity was better than expected in the U.S., the U.K., Japan, France, and Spain, while Germany and Italy underperformed.

The labour market brought capital market volatility in early August following weaker-than-expected U.S. jobs numbers and heavy downward revisions for prior months. Investors spun the negative news into gold, believing the data will motivate the U.S. Federal Reserve to resume cutting the Fed funds rate. Labour markets are currently undergoing a transition. While job growth is slowing, this is a two-sided issue – demand for labour and supply of labour. In the U.S. and Canada, both are shrinking. Immigration changes, aging populations, slimmed down government payrolls (private sector employment is more important to capital markets), and productivity may mean that fewer new jobs will be needed to keep unemployment balanced and hence consumers healthy.

Rounding out the positive economic news, business investment is humming (thanks to AI and the associated electricity and data storage needs) and governments are poised to boost economic growth using fiscal stimulus.

Trimming public sector employment (the pace of expansion was frenetic over the past few years) creates a fiscal drag. However, governments are still poised to spend copious amounts of money. Historically, more government spending meant a fatter public service. Today, there is little appetite (both societal and political) for swelling government payrolls. More of the government’s spending will flow to the private sector – send in the capitalists.

The big takeaway from the month, in our opinion, was this past Q2 earnings season. Corporations are churning out earnings growth. By pushing to new all-time highs, markets are weighing in on a key question: if earnings can remain strong through all the uncertainty, how much better might things get if the headwinds dissipate? What if the quarters ahead bring better growth, less tariff uncertainty and less geopolitical insecurity? Equity markets aren’t cheap, but earnings growth is delivering. Consider that forward price-to-earnings multiples for the S&P 500, S&P/TSX Composite, EuroStoxx 600, and MSCI Emerging Markets Index are currently below their earlier-year highs.

For the S&P 500, August brought a 1.9% rise. Q2 aggregate earnings growth came in at 12%, marking the third straight quarter of double-digit growth. For those worried that a handful of big names are driving this momentum, more than 100 companies delivered earnings growth of over 20%, and 81% of companies beat analyst estimates.

Canada’s S&P/TSX Composite was the top developed market in August, returning a bumper 4.8% and remains among the best markets year to date. Second-quarter earnings growth was 9%, led by strength from gold miners (materials sector earnings growth was 50%). Financials (the index’s largest sector) crushed expectations and delivered 12% earnings growth – double the expected.

The media are spilling a lot of ink on the drama unfolding at the U.S. Federal Reserve – resignations, firings (maybe), and subsequent new appointments. Investors left these details to the academics and simply cut to the chase: they believe rate cuts are likely after Fed Chair Jerome Powell’s statements left little doubt that policy easing will resume in September. Along with rate cuts will come lower borrowing costs and liquidity plus the economic benefits these bring.

“How can my investments be doing so well this year?” is a frequent question we get. In the past, we have reminded folks that keeping emotions out of investment decisions is an ongoing challenge. This year has brought a great deal of uncertainty; parsing short-term noise from long-term fundamental change is difficult at the best of times. It’s especially challenging when the sheer enormity of potential change reaches the levels global investors have faced in 2025.

Keep in mind that what the media choose to put in focus isn’t necessarily the focus of capital markets. And what passes for news these days isn’t exactly a Walter-Cronkite level of unbiased reporting. The media are not in business to help you achieve your financial goals. Their objective is to make money (and it is a disrupted and threatened business in many ways). To achieve their objective, they must attract attention (eyeballs and clicks). “If it bleeds, it leads” is an old formula whose roots date back to the yellow journalism of the 1890s. All manner of traditional and non-traditional media and social media cater to our fears and perpetuate polarization. Eye-catching headlines and sensationalized exaggerations can make it difficult to form opinions conducive to rational and objective investment decisions. We recognize that bias is pervasive. To counter that, we always suggest a pause to think critically, plus conversations with us never hurt to help you keep things in perspective.

 

Source: BMO Nesbitt Burns Global Markets Commentary – Good Vibrations

 

 

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