Uncertainty Reigns, But Strategy Prevails
The first quarter of 2025 has been marked by heightened uncertainty and uneven market performance across North American equity indices. While Canadian equities have managed to hold onto modest gains, U.S. markets have struggled amid economic concerns and policy uncertainty.
The S&P/TSX Composite Index gained 0.77% in the first quarter, while the TSX Small Cap Index posted a similar 0.37% increase. Canadian equities benefited from a more accommodative monetary policy stance, as the Bank of Canada implemented two 0.25% rate cuts, bringing the overnight rate to 2.75%. These rate reductions provided support to interest rate-sensitive sectors which helped buoy the broader market despite global economic headwinds.
In contrast, U.S. equities struggled in Q1. The S&P 500 declined by 4.64%, while the S&P 600 Small Cap Index experienced a more pronounced drop of 9.69%. The Federal Reserve opted to maintain its policy rate at 4.5%, keeping borrowing costs elevated. With no indication of near-term rate cuts, market participants remained cautious, leading to weaker investor sentiment and increased volatility.
One of the primary sources of uncertainty this quarter has been the Trump administration’s trade policy. Ongoing debates regarding the potential implementation of new tariffs have created a cloud of uncertainty for businesses and investors alike. While no definitive tariffs have been enacted yet, the looming possibility has led to downward revisions in economic growth forecasts, further weighing on investor confidence.
Additionally, the divergence in monetary policy between the Bank of Canada and the U.S. Federal Reserve has led to shifting capital flows. The Bank of Canada’s rate cuts have made Canadian assets relatively more attractive, while in the U.S., higher rates have restrained economic momentum and corporate earnings expectations.
Investor sentiment remains subdued as markets grapple with ongoing policy uncertainty and economic concerns. The lack of clarity regarding trade policy has left businesses hesitant to commit to capital expenditures, potentially dampening growth prospects in the near term. While some investors remain optimistic that a resolution on trade policy could provide a relief rally, the broader outlook remains cautious.
Looking ahead, market participants will be closely watching for further developments in U.S. trade policy and any shifts in central bank positioning. Should clarity emerge on the tariff situation, equities could see a rebound. However, continued uncertainty and potential earnings weakness may keep market sentiment muted in the near term.
In Canada, further rate cuts remain a possibility if economic conditions warrant additional stimulus. However, the effectiveness of monetary easing will depend on broader global economic trends and the resolution of trade tensions. For now, cautious optimism prevails, with investors remaining vigilant amid a challenging macroeconomic backdrop.
Through all the noise, one thing remains clear—staying disciplined and focused on long-term objectives is key. While headlines may shift, our strategy remains steady, ensuring that your investments are positioned to weather volatility and seize opportunities as they arise.
Written By: Alexander McCallum
