Jay Smith & Brad Brown
June 02, 2025
Monthly commentaryJune 2025
MONTHLY MARKET MUSINGS
June 2025
Rest Assured The Weather Is Improving
The weather in the past month or so in the Greater Toronto Area has been inconsistent if anything. One day it's sunny with clear skies, the next day it's cold and cloudy - lawnmower or snowblower this week? The variation in the weather was not all that different from what we have experienced in the financial markets and the news headlines in the past month. Some good news one day, some bad news the next. While the ongoing market noise has made it difficult for many to have confidence in the markets, much like the weather, it is, in fact, getting better.
We are winding down the first earnings season since the new U.S. administration has taken office and despite the concerns from the tariff policies, the results have been promising and should give investors some sense of relief and hope. As of the time of this writing, 491 of the 500 companies in the S&P 500 Index (S&P) have reported. Of those, 77.5% have topped consensus estimates on earnings with the average earnings beat coming in 7.66% higher than consensus forecasts. U.S. earnings growth is up an average of approximately 12.5% year-over-year in the most recent quarter across the companies in the S&P. For the S&P/TSX Composite Index (TSX), 208 out of 217 companies have reported with 56.6% having beaten consensus earnings estimates while another 10.7% reported results that were in-line with consensus. Canadian earnings growth is up an average of approximately 16.6% year-over-year in the most recent quarter across the companies in the TSX. Corporate results continued to show strength despite the trade situation and chaos of the early months of 2025. As we have previously noted, many corporations have pulled their guidance for this year due to the uncertainty of the tariff fallout. According to Reuters, the trade war has cost U.S. corporations more than US$34 billion so far in lost revenue and added expenses. There are expectations that this amount could continue to grow over time.[1] Ultimately, the tariffs will also have an impact on inflation as well as business and consumer spending, but the scale of this impact is not clear at this stage and some of this expectation has already been priced into the equity markets.
In the past week, in regard to the tariffs, we have seen more back and forth as the U.S. Court of International Trade ruled to block a large portion of the Trump administration's tariffs. This lasted less than 24 hours as the U.S. Court of Appeals granted an emergency motion to allow the tariffs to continue arguing that the collection of tariffs is critical to the country's national security[2]. The legality of the tariffs will be a politicized debate in court and in the meantime the deals between countries will continue to be negotiated with the hopes of deals being reached before the 90-day pause expires. This will keep the market on edge and volatile for the foreseeable future. Ultimately, the Trump team has noted that they expect to prevail on their appeal or plan to use other presidential powers to ensure that the tariffs remain in place.[3]
Another recent added concern for the market has been the downgrade of the United States' credit rating below AAA by the credit rating agency Moody's. The downgrade was attributed to the increasing unease about the size of the growing U.S. budget deficit along with the rising cost of the interest to service that debt. The recent Trump tax bill is, according to some, expected to add US$3-$5 trillion to the country's US$36.2 trillion debt over the coming decade.[4] While the equity market had an initial negative reaction and some have suggested that the downgrade was politically-motivated, the reality is that Moody's was the last of the big three credit rating agencies to downgrade the U.S. Previously, S&P had downgraded the U.S. in 2011 and Fitch had downgraded it in 2023 so the Moody's downgrade shouldn't have come as too much of a surprise. The move initially sent U.S. government mid-to-long term bonds lower and rates higher (yields are inversely related to bond prices) steepening the U.S. yield curve in the process. Yields have settled slightly lower in the week that followed.
Despite the ongoing risks of increased tariffs if trade deals fail to materialize within the set timeline and the U.S. debt situation, we are optimistic about equities as earnings seem to be quite resilient and growth is still progressing. Markets will remain tied to the volatility caused by the trade war and Trump, but this can offer opportunistic entry points to add to positions that will result in positive returns over the longer term.
JAY SMITH, CIM®, FCSI
Senior Portfolio Manager & Senior Wealth Advisor
BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor
[1] https://www.reuters.com/business/trumps-tariff-tally-34-billion-counting-global-companies-say-2025-05-29/
[2] https://www.cbc.ca/news/world/trump-tariffs-appeal-court-ruling-1.7547404
[3] https://www.reuters.com/business/us-ruling-that-trump-tariffs-are-unlawful-stirs-relief-uncertainty-2025-05-29/
[4] https://www.reuters.com/world/us/us-treasury-chief-dismisses-moodys-downgrade-amid-trump-tax-cut-debate-2025-05-18/