December 2025 - Monthly Update

“A variety of crosscurrents are in play for the U.S. market. U.S. equities are not cheap, but they also feature solid earnings-growth expectations. The market remains home to some of the world’s best companies – and not just in technology. We don’t see room for valuation expansion at the index level, but we do see room for a rotation within U.S. equity markets that can drive further returns. Outside the mega-companies, valuations are more reasonable in other parts of the U.S. stock market. An examination of the equally weighted version of the S&P 500, which adjusts for the outsized impact of the largest companies, shows valuations at a more reasonable 20 times earnings... We see powerful ingredients for continued expansion in U.S. equities. There are solid indications that the U.S. is enjoying a productivity boom; this feeds strong profit margins, earnings and GDP growth... The S&P/TSX Composite Index has enjoyed a solid rally during 2025, besting many other equity markets. For the most part, tariffs on Canada have turned out to be less impactful than originally feared. The USMCA remains in force, leaving tariff rates in the low single-digits for most of Canada’s U.S.-bound trade. The trade war has yet to significantly dampen corporate earnings at the index level in Canada. However, future investment and sentiment have been negatively impacted. Clarity on U.S.-Canada trade is imperative. In the meantime, the government’s fiscal spending plans are a formidable near-term shot in the arm and target investments for the long term… Forecasts for a recession have been unwarranted so far. Significantly, we remind folks that the S&P/TSX is not the Canadian economy: 65% of the index is in financials, energy and materials. Tariffs on Canadian oil and minerals are 10%. Our low currency helps, plus U.S. buyers have few options for substitution. There are no tariffs on gold. Because the price of gold has jumped over 50% year to date, the S&P/TSX gold subsector has doubled, driving roughly one-third of the S&P/TSX return. The financial sector is benefitting from a more favourable interest rate environment (lower short rates versus higher long rates favour banks’ core lending business). The largest Canadian companies in many sectors have significant U.S. earnings exposure thanks to their U.S. operations, where there are no tariffs at all. Our weak loonie boosts exporters and inflates U.S. dollar profits, including repatriated profits from these Canadian companies’ U.S. operations. Thanks to ebbing inflation, the soft Canadian economy and trade war overhang, the Bank of Canada has cut the overnight rate from 5% to 2.25% in 18 months and the bond market has followed suit. Additionally, the sluggish economy and labour market are moderating wage growth, helping profit margins as Canadian companies sell abroad but borrow and hire at home. Canadian equity market valuations are above their longer-term average; lower interest rates tend to lead to higher valuation.”