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Market Commentary April 2025

Key Takeaways for Q1

Economic policy became more uncertain with fluctuating tariff announcements from the U.S. and its trading partners.
Global stocks markets experienced heightened volatility year-to-date, reflecting the negative repercussions of tariffs for highly integrated global economies.
Within U.S. markets, investors rotated out of growth stocks into value and defensive areas of the market.
Bond markets performed well during the quarter as interest rates moved lower.
Most central banks continued to ease monetary policy by reducing their target interest rates. The U.S. Federal Reserve was a notable exception, electing to wait for greater clarity before lowering rates further.

Economic and Market Update

Economic Summary: In the U.S., the latest GDP data confirmed solid economic growth in 2024. However, as President Trump pushes forward his economic agenda, uncertainty surrounding fiscal policy and global trade have dampened market sentiment. Inflation pressures persisted, with the rate of inflation remaining above the central bank’s 2% objective. The labour market in the U.S. remained resilient, with unemployment rate staying low compared to historical norms. The Federal Reserve shifted to a more cautious approach, holding the policy rate steady through Q1 at the range 4.25% - 4.5%. The central bank raised its inflation forecast, lowered growth projections, and warned that “uncertainty around the economic outlook has increased.” U.S. bond yields were lower for most maturity dates during the first quarter, as the market priced in more growth concerns and anticipated more rate cuts from the Federal Reserve.

In Canada, recent GDP data showed stronger-than-expected growth. The inflation rate remained close to the 2% target but rose more than expected in February, and the labour market showed signs of improvement. U.S. tariffs continued to be a significant concern, and it is prompting businesses and consumers to become more cautious and slow their spending. The Bank of Canada warned that the economic impact of the tariffs could be “severe” and expected weaker growth in the coming quarters. For those reasons the Bank of Canada continued its easing cycle, cutting rates by 25 basis points at each of the January and March meetings, bringing the policy rate to 2.75%. Bond yields in Canada were also lower, with short-term interest rates decreasing faster than long-term interest rates as the Bank of Canada’s rate cuts outpaced market expectations.

Bond Markets: During Q1 2025, the FTSE Canada Universe Bond Index returned 2.0% as interest rates declined across all tenors. Although interest rates fell, this was partially offset by higher credit spreads (i.e. the extra yield on corporate bonds versus government bonds to compensate for their extra risk). Consequently, while corporate bonds still generated a positive return on the quarter, they underperformed government bonds. Widening credit spreads reflected the risk-off tone to the market, with on-off-on-off-on(?) tariffs contributing to the uncertainty. Lower-rated BBB bonds generally performed worse than higher-quality A-rated bonds. While credit spreads are higher than they were in December and January, they are still expensive compared to longer term averages. Corporate bond issuance remained robust up until the last week of March, as investor demand kept deals well supported. Overall, the market took in $40 billion in new issuance, the second highest on record, spread over 82 bonds. While corporate bonds are more attractive than in January 2025, we believe the more likely path is towards higher credit spreads as U.S. tariffs impact global growth. We have maintained our conservative view with a bias towards shorter-dated credit but remain ready to invest in longer dated corporate bonds as valuations become more attractive.

Stock Markets – Overview:
Uncertainty surrounding the scope and severity of new tariffs led investors to reassess global economic growth prospects and weighed on risk sentiment. As a result, the S&P 500 declined 4.3% over the quarter, underperforming Canadian and international markets. Within the U.S., investors rotated out of previously favoured growth stocks with loftier valuations – including members of the Magnificent 7 – into less volatile and value-cyclical companies. Meanwhile, Canadian equities returned 1.5% in Q1 despite ongoing trade negotiations and uncertain economic growth forecasts. Surging commodity prices helped the materials and energy sectors outperform, offsetting weakness in the technology and industrials sectors. Elsewhere, major developed markets from Europe and Asia (EAFE) were supported over the quarter by the introduction of a new German fiscal stimulus package and signs of improving Chinese economic growth. Following the quarter end, President Trump announced global tariffs on April 2^nd, prompting some trading partners to hit back with retaliatory tariffs. The S&P 500 lost a record $5.2 trillion over two trading sessions and re-entered correction territory, with other global equity markets moving in tandem.

U.S. Equities: While the impact of tariffs has made investors more apprehensive, we have yet to witness a deterioration in financial performance. In fact, U.S. earnings continued to exceed forecasts last quarter, with approximately 70% of companies beating expectations. Furthermore, our bottom-up analysis shows that the skew of corporate earnings surprises continues to tilt positive. That said, we note that companies are providing more cautious guidance amid the increased economic uncertainty and that these earnings largely reflect conditions in 2024, not 2025. Notably, consumer stocks like Walmart have lowered growth forecasts for 2025, citing concerns surrounding consumer confidence and macroeconomic conditions. In addition to clouding the outlook, geopolitical shocks like sweeping tariffs may risk changing how companies choose to operate, including the structure of supply chains and sources of revenue. At this stage, it is still unclear how long these trade tensions will last, as that depends on how other countries choose to respond. If the tariffs are rolled back quickly, many companies may be able to absorb the temporary extra costs without serious damage to profits, and the broader economy could avoid lasting harm. But if the tariffs remain in place for a long time, the consequences could be much more serious; companies might have to change how they operate, restructure supply chains, and raise prices to deal with long-term pressure on profits.

Canadian Equities: Against the backdrop of worrisome trade developments, the Bank of Canada continued to ease monetary policy. While lower rates have helped Canadian companies report better-than-expected profit growth, consensus earnings expectations for 2025 have been revised 2% lower since the beginning of the year, reflecting the expectations for tariff headwinds. Falling bond yields made high quality, high dividend paying companies more attractive, helping this group outperform. Furthermore, the price of raw industrials – a basket of commodities – surged higher over the quarter and as a result, commodity-oriented companies benefitted. More specifically, the materials sector performed strongly with gold prices reaching new all-time highs throughout the quarter. However, if trade frictions continue to escalate and weaker growth projections materialize into a real economic slowdown, the Canadian market, given its cyclical nature and heavy reliance on commodity-driven businesses, remains particularly vulnerable to external headwinds. Moreover, given Canada’s weaker fundamental backdrop, we caution that the recent outperformance of Canadian equities relative to the U.S. may prove short-lived, particularly if trade tension persists.

Bottom line:
Heightened uncertainty surrounding global trade policies, coupled with deteriorating economic growth projections, continued to weigh on investor sentiment. Bond prices benefited from the flight to less-risky assets, with lower interest rates in anticipation of weaker economic conditions. In equity markets, the introduction of broad-based tariffs increased market volatility and drove major indices sharply lower year-to-date. Looking forward, we remain cautious of the recent outperformance of Canadian and international markets relative to the U.S. While tariffs began as a U.S. policy move, the ripple effects extend far beyond American borders, reflecting the systemic fragility that underpins global trade. If trade barriers persist, businesses may be forced to make structural shifts in their operations and review their current business models. Until markets achieve greater clarity on global trade policies, we continue to prioritize exposure to diversified large-cap stocks in the U.S., over defensive or growth-heavy positions. Within Canada, we continue to favour high quality, high dividend paying names with less sensitivity to downgrades in global growth.

Downloadable Copy

Mark Warywoda, CFA VP, Public Portfolio Management	Ian Whiteside, CFA, MBA AVP, Public Portfolio Management	Johanna Shaw, CFA Director, Portfolio Management	Jin Li Director, Equity Portfolio Management
Tyler Farrow, CFA Senior Analyst, Equity	Andrew Vermeer Senior Analyst, Credit	Elizabeth Ayodele Analyst, Credit	Francie Chen Analyst, Rates

ADVISOR USE ONLY

Any statements contained herein that are not based on historical fact are forward-looking statements. Any forward-looking statements represent the portfolio manager’s best judgment as of the present date as to what may occur in the future. However, forward-looking statements are subject to many risks, uncertainties, and assumptions, and are based on the portfolio manager’s present opinions and views. For this reason, the actual outcome of the events or results predicted may differ materially from what is expressed. Furthermore, the portfolio manager’s views, opinions or assumptions may subsequently change based on previously unknown information, or for other reasons. Equitable® assumes no obligation to update any forward-looking information contained herein. The reader is cautioned to consider these and other factors carefully and not to place undue reliance on forward-looking statements. Investments may increase or decrease in value and are invested at the risk of the investor. Investment values change frequently, and past performance does not guarantee future results. Professional advice should be sought before an investor embarks on any investment strategy.

Market Comments - October 2024

Key Takeaways for Q3

· Central banks eased monetary policy by reducing their target interest rates.
· Bond markets performed very well during the quarter as interest rates fell.
· Risk markets experienced some volatility, but stock markets had robust returns.
· Canadian stocks outperformed U.S. stocks in Q3, while the sources of returns in the U.S. market were more balanced and diversified than in the first half of the year.

Views From the Frontline

Bond Markets: During the third quarter, interest rates in both Canada and the U.S. moved significantly lower as markets anticipated that the Bank of Canada would continue – and the Federal Reserve would start – cutting rates. Additionally, the expectation became that the central banks would end up lowering rates more aggressively than previously assumed. That’s because inflation data has softened sufficiently to give the central banks the scope to ease policy, and other economic data, especially from the labour market, indicated the need for them to ease policy in order to prevent economic activity from cooling too much. For instance, in Canada, inflation slowed to the Bank of Canada’s 2% target, while the labour market showed warning signs with the unemployment rate rising to 6.6%. The Bank of Canada cut its target interest rate by 0.25% at each of its July and September meetings. Governor Macklem indicated that if growth does not materialize as expected, “it could be appropriate to move faster on interest rates”. In the U.S., the Federal Reserve kicked off its easing cycle by cutting its target rate by 0.50% in September. The growing signs of a cooling labour market amidst slowing inflation motivated the larger-than-typical move. That said, consumer spending in the U.S. continued to be strong, and GDP is still tracking a healthy growth rate.

While interest rates fell, bonds returns were also boosted by solid behaviour of corporate bonds. Credit spreads (i.e. the risk premium for corporate bonds versus government bonds) continued to grind lower over the quarter. Tightening credit spreads reflected the generally positive risk-on tone to the market, despite some volatility. Lower-rated BBB bonds performed better than higher-quality A-rated bonds. Credit spreads have now generally fallen back to levels that are largely consistent with the tight post-pandemic levels experienced in 2021. The on-going appetite of investors for the extra yield offered by corporate bonds over government bonds is indicated not just by falling credit spreads, but also by investors’ enthusiasm to support the primary issuance market. Corporate bond supply continues to be very robust, with $29B (billion) in new issuance during the quarter, resulting in an impressive $119B issued year-to-date, a new record. Nonetheless, on balance, we do not think the current risk premium adequately compensates for downside risk, particularly in longer-dated corporate bonds, and have a bias towards shorter-dated credit where we view the risk / reward trade-off as being more favourable.

Stock Markets: In the U.S., we continue to caution against heavily concentrated sources of market returns and emphasize a diversified portfolio. Last quarter, diversification proved essential as a multitude of factors heightened market volatility. These factors – which included the unwind of the yen carry trade, investor reactions to mixed mega-cap earnings, and concerns of a slowing labour market – drove investors away from mega-cap technology names and into defensive areas of the market. Following the Federal Reserve’s decision to reduce interest rates by 0.5%, sources of investment returns continued to broaden as investors rotated into economically-sensitive baskets. Underpinned by decelerating inflation and easing monetary policy, we believe the rotation away from the mega-cap tech names is likely to persist and we continue to emphasize portfolio diversification. In Canada, high-quality, high-yielding businesses – composed of the financial sector and non-financial dividend payers – outperformed over the quarter as investors rewarded companies that demonstrated a strong ability to sustain dividends, as well as greater efficiency generating profits. While we continue to favour these businesses, we have taken profit on our financial sector dividend exposure after a sharp reversion in the premium between value creation and current yield. In addition, Chinese officials introduced a wave of stimulus to revitalize growth, bringing life back to the metals and luxury goods sectors. Accordingly, Canadian and European equities have benefitted recently.

Market Update

Rates & Credit: In Q3, interest rates in both Canada and the U.S. decreased significantly, with front-end interest rates declining faster than long-end interest rates amid cooling inflation and a weakening labour market. As a result, the FTSE Canada Universe Index posted a positive return of 4.7%. Coincidentally, Canadian corporate bonds and government bonds each also generated returns of 4.7%, totally in-line with the Universe index. On the other hand, despite short-term interest rates falling much more than long-term interest rates, the higher price sensitivity of long-dated bonds had them outperform shorter-dated bonds, with the Long-Term bond index up 5.8% while the Short-Term bond index gained 3.4%. Similarly, within corporate bonds, industries that have longer-dated debt (e.g. energy and infrastructure) outperformed those that tend to have shorter-dated debt (e.g. real estate and financials).

Equity Overview: Underpinned by decelerating inflation data and easing monetary policy – including the outsize 50-basis cut from the Federal Reserve – prospects for an economic soft landing increased over the quarter. That favourable outlook spurred global equity markets to all-time highs, with previously lagging areas of the market narrowing the performance gap compared to the U.S. mega-cap technology names that had led returns in the first half of the year. Canadian equities outperformed their U.S. counterpart last quarter, rising 10.5% as strength in the banking and materials sectors pushed the index higher. Major developed markets from Europe, Australasia, and the Far East (EAFE) were more subdued, gaining 0.9% (in local currency terms) last quarter. That said, grand expectations for further interest rate cuts in the U.S. pushed the greenback to its lowest level in over a year, boosting EAFE returns to over 7% in U.S. dollar terms. Within the U.S., sources of market returns broadened as well, with investors rotating out of concentrated AI companies and into more economically sensitive businesses.

U.S. Fundamentals: Outside of the Magnificent 7, investors are interpreting downside earnings surprises as a normalization of financial performance rather than a deterioration. For example, McDonald’s share price rallied over 17% into quarter-end following its earnings release despite announcing declining sales and contracting earnings per share. Within the AI-ecosystem, investors are beginning to look for opportunities beyond chip manufacturers, such as nuclear energy providers. At an index level, our work shows that members of the Russell 1000 index, excluding the Mag-7, posted a median earnings growth of nearly 9% year-over-year, expanding from the ~6% witnessed in Q2. Furthermore, the number of companies from this group reporting positive earnings growth grew to approximately 67%, up from 60% in the prior quarter. In our view, the ongoing broadening of earnings strength outside of the Mag-7 can provide tailwinds to current market rotations into previously left-behind companies. Within the mega-cap tech space, investors have become more discriminant than in prior quarters, rewarding businesses with greater success monetizing their AI-investments. This trend was evident through the divergence of returns from IBM and Alphabet (Google’s parent company) following their quarterly earnings.

U.S. Quant Factors: Decelerating U.S. inflation data prompted a rotation out of highly concentrated areas of the market (growth) and into more economically-sensitive companies (value). Then, concerns of a slowing U.S. labour market and the unwind of the yen carry trade increased market volatility, leading investors to shelter their positions by reallocating to low volatility. As the quarter progressed, expectations of easing monetary policy and stabilizing employment data helped calm return to the market and the rotation from mega-cap tech sector resumed, albeit at a lesser pace. Notably, this “catch-up” trade also benefitted dividend-paying companies, particularly those with a lengthy and established history of increasing dividends, as investors favoured those more mature operations.

Canadian Fundamentals: Investors returned to the Canadian market after Canadian companies showed signs of recovery last quarter with earnings expanding by more than expected. With inflation showing clearer signs of deceleration and the outlook regarding the path of monetary policy increasingly implying lower interest rates going forward, investors are allocating toward high-quality, dividend-paying companies. From a sector level, surging gold prices provided a tailwind for Canadian miners, helping the materials sector outperform over the quarter. More recently, the materials sector has benefitted from elevated base metal prices following the arrival of Chinese stimulus. In contrast, oil prices declined over 16% last quarter as fears of an oversupplied market swelled following speculation that OPEC+ would look to dial back production cuts. As a result, investors looked past lingering geopolitical risks and the energy sector underperformed.

Canadian Quant Factors: Amid an improving Canadian macroeconomic backdrop and clearer outlook on the trajectory of monetary policy, dividend-yielding businesses became sought after. More specifically, investors continued to emphasize dividend sustainability last quarter, rewarding dividend-paying businesses that demonstrated strong financial performance and the ability to support future payouts. For example, the major Canadian banks sharply outperformed in Q3 after reporting earnings growth that mostly exceeded expectations. In essence, investors have become more constructive on this high-yielding group as their ability to create value relative to financing costs improves.

Downloadable Copy

Mark Warywoda, CFA VP, Public Portfolio Management	Ian Whiteside, CFA, MBA AVP, Public Portfolio Management	Johanna Shaw, CFA Director, Portfolio Management	Jin Li Director, Equity Portfolio Management
Tyler Farrow, CFA Senior Analyst, Equity	Andrew Vermeer Senior Analyst, Credit	Elizabeth Ayodele Analyst, Credit	Francie Chen Analyst, Rates

ADVISOR USE ONLY

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