Clarity Emerges, but Volatility Persists
The second quarter of 2025 began on uncertain footing following “Liberation Day,” a surprise policy announcement in the United States on April 2nd that triggered a wave of market volatility. The resulting selloff saw equities decline sharply as investors scrambled to understand the fiscal and regulatory implications. Despite this early disruption, markets regained stability over the quarter and ended with gains due to the administration’s decision to pause the tariffs for 90 days as well as the announcement of several tentative trade deals.
Canadian equities posted modest gains in Q2, buoyed by strength in energy and defensiveness in rate-sensitive sectors. The S&P/TSX Composite Index rose 7.75% while the TSX Small Cap Index gained 11.04%. The Bank of Canada held its overnight rate steady at 2.75% throughout the quarter, balancing inflation management with concern over slowing growth. While materials lagged due to weak global demand, gains in financials and utilities offset sector-specific weakness.
South of the border, U.S. equities experienced a sharp selloff at the start of the quarter in response to Liberation Day, with the S&P 500 in early April. Market volatility surged, but as fiscal policy details became clearer risk appetite gradually returned. The S&P 500 ended the quarter up 10.56%, while the S&P 600 Small Cap Index advanced 4.68%. The Federal Reserve held its benchmark rate at 4.5%, reinforcing a data-dependent stance amid mixed inflation signals. Though gains were concentrated in technology and AI-linked names, improved market breadth in June signaled a tentative broadening of leadership. Still, high valuations and sensitivity to future policy shifts remain key risks.
While volatility has moderated since the start of the quarter, the underlying tone of markets remains cautious. Policy remains a dominant force in shaping investor behavior, with central banks walking a fine line between restraint and support. Inflation has continued to trend in the right direction, but any surprises—fiscal or geopolitical—could quickly shake the current fragile equilibrium. Markets appear more selective, and leadership continues to rotate. With sentiment still somewhat fragile, long-term discipline and diversification remain the most reliable tools in navigating what continues to be an unpredictable environment.
Amid the headlines and market swings that defined the quarter, the fundamentals of sound investing remain unchanged. While Liberation Day and its aftermath reminded us that surprises can emerge without warning, the market’s ability to stabilize and move forward reinforces the value of maintaining a balanced, patient approach. Our commitment to prudent portfolio construction and strategic asset allocation continues to provide the foundation needed to capitalize on opportunities while managing downside risk. As uncertainty persists, we remain focused on what we can control: building resilient portfolios designed to perform across various market conditions. In times like these, experience and expertise matter most, and we’re well-positioned to help you navigate whatever challenges and opportunities lie ahead.
Written by: Alex McCallum
