July 08, 2025

Markets overview
The second quarter of 2025 was tumultuous, starting with a significant equity market correction and ending with stocks reaching new highs. Initially, markets contended with substantially higher tariffs than expected
and the potential for an all-out trade war. The situation was further complicated by the political wrangling over the United States (US) budget bill — which, if not passed, would have resulted in higher taxes — as well as the US credit
rating downgrade, and the war between Israel and Iran, which culminated in the US striking Iranian nuclear enrichment sites. Despite these headwinds, the global economy held up well, and there is a feeling that the worst is behind us. Early concerns
about a significant growth scare have subsided. Furthermore, the potential negative effects of trade policy may be offset by strong global fiscal stimulus and the possibility that many central banks still have room to cut rates.
US exceptionalism remained in question this second quarter as the S&P 500 Index underperformed again. Across markets, technology stocks led the recovery after a rocky start to the year. Returns were also strong for industrial stocks — such as
construction and defense companies — which are tied to an improving economic outlook and higher fiscal spending.

Bond markets were also volatile this quarter and Canadian yields were rising. The FTSE Canada Universe Bond Index generated a -0.6% return for the quarter and is up 1.4% year-to-date. Thus far, inflation readings have been more favourable than initially feared, and growth concerns have faded. However, investors required higher yields to compensate for growing government spending. Short-term bonds and credit, which are less sensitive to rising bond yields, were two areas of the bond market that outperformed.
Portfolio strategy
The global economy has remained solid, and inflation was better than expected. Looking forward we believe that while economic growth will slow, the downside seems limited. Inflation may be tempered by a cooling labour market and slower wage growth. For
this reason, many central banks are expected to cut rates further in the second half of the year, after having been on a “pause”. This, combined with significant fiscal spending across the globe, is a decent backdrop for equities and credit.
However, risks remain. In particular, the full impact of trade policy and tariff uncertainty hasn’t been fully reflected in the growth and inflation data to date. While more is now known about trade policy and fiscal spending, the economic outcome
remains uncertain and wide-ranging.
Our positioning within equity portfolios takes these risks into account, while recognizing that this may prove a favourable environment for stocks. Across portfolios, we maintain a balance between high-quality cyclical companies (which are poised to benefit
if growth remains resilient) and defensive names. Within the defensive areas of portfolios, we are focused on companies with stable earnings growth, strong pricing power, and limited downside earnings risk.
This year, our investment teams have focused on understanding how tariffs may impact companies on a case-by-case basis. This includes the effects on costs, the ability to pass on price increases to consumers, and the potential for demand destruction.
While the worst of the trade uncertainty may be behind us, many trade deals are yet to be negotiated and tariffs remain a significant risk.
Within fixed income we have positioned portfolios to benefit from falling yields on shorter-maturity bonds (as central banks are expected to cut rates later this year), while also positioning for a potential rise in long-term yields. We see the volatility
in traditional core bonds continuing and have therefore made allocations to short-term bonds and credit, which are better positioned to outperform if longer-term yields rise. Over the past year, we have also broadened our investment strategies
within fixed income, which we believe may benefit clients.
Volatility is inherent in investing, and while it can be uncomfortable to embrace market fluctuations, investors who see through the short-term uncertainty may stand to benefit as we seek to capitalize on the opportunities that arise during such periods,
and compound client wealth over time. To this end, private markets remain attractive as part of a strategic allocation, particularly in an environment where traditional investments are volatile.