MONTHLY MARKET MUSINGS

August 2025

Expectations For An Interesting Rest Of 2025

The tariffs have taken center stage once again as the Trump administration pushed forth with some deals over the past few months but also increased the pressure on several nations, including Canada, who have yet to secure an agreement. Tariff negotiations with Canada have not been smooth and Canada now faces higher overall tariffs compared to the initial tariff levels that were announced in early 2025. While the Canadian government did move ahead with the elimination of the Digital Services Tax, several other issues have prevented an agreement from being reached. We hope that Canada will be able to come to an agreement sooner rather than later, given that it seems that the longer this drags on, the weaker the cards in our hand become.

The U.S. Federal Reserve (Fed) continues to be in an interesting predicament as it watches economic data to decide its next move. U.S. Federal Reserve Chair Jerome Powell has shown during his tenure that he is not someone who is swayed by politics and that the independence of the U.S. Federal Reserve is of the utmost importance. Powell has reiterated this despite the strong criticism from the current U.S. administration and the fact that he is certainly going to be replaced in May of next year as his term ends. Trump continues to advocate for an interest rate cut to help spur the economy even more as well as reduce the interest paid on U.S. debt including the additional deficit spending from the recent tax bill. The Fed, however, has assumed a neutral stance, at the moment, as Powell has said that the tariffs have begun to show up in the prices of some goods but has noted that the tariffs' "overall effects on inflation and the economy remain to be seen." [1] If it were shown that the tariffs were significantly impacting prices, then the Fed would likely look to hike rates to curb the inflation, although this could cause economic growth to slow as a result.

Q2 earnings have continued their positive trend in the U.S. as most companies have continued to post earnings beats alongside year-over-year earnings growth. In many cases, the biggest growth has come from the technology, communication services, and financial sectors. In some cases, the market has punished certain companies which have seemingly put up good quarters due to overall macro concern and what seems to be a desperate attempt to find a thorn within a bouquet of roses. In our view, in many of these cases, this has created opportunities to buy shares of solid companies at a discount. Economists have begun to suggest that despite solid second quarter U.S. GDP growth, which surpassed consensus estimates, that the numbers for the first half of 2025 are more of a reflection of inventory front-running as a result of the tariff announcements. The view suggests that growth overall may be softening as business plans and consumer spending decisions have been put off as a result of the tariffs. The question, however, is whether the initial uncertainty from consumers has changed the overall longer-term sentiment or whether it is a slight deviation due to the tariffs and that ultimately, the longer-term spending trend will resume. While added tariffs may have an impact on inflation and potentially deter some spending, the uncertainty of the tariffs, in general, is likely more the culprit of the hesitation. Consumers, like investors, tend to be most apprehensive when uncertainty exists. Consumers will often hold off on the purchase of big-ticket items if there is a possible disruption in their cash flow or income in the near term. As the tariff negotiations continue and more agreements are made, there is a likelihood that consumer activity will revert back to similar levels previously seen so long as the unemployment situation remains healthy and inflation remains in check.

Where does that leave investors for the rest of 2025?

For the months ahead, it is likely that investors may enter a period of nervousness as some trade deals remain undecided and as we near the historically worst part of the year, September and October. Further adding to the potential volatility is the ongoing concern regarding the U.S. deficit with the recent passing of the tax bill, although, many do believe that the tax cuts and increased deductions should result in a tailwind for the U.S. economy in the coming years. The trade agreements will remain at the forefront but will likely have a diminishing importance as we move towards the end of 2025 and into 2026. The economic impact of those agreements may linger as a concern as the jury is still out on whether the tariffs will have a big effect on inflation or not. The growth of the economy and the labour market will set the stage for investor sentiment heading into year-end and 2026. With the reshoring of jobs and manufacturing as well as the slowing of immigration/deportation that is taking place, we may see a situation where there is a scarcity of labour to meet the demand needs within the U.S. given that the economy is at what economist define as full employment (typically this is when unemployment is at about 4-5%)[2]. There essentially seems to be very little slack in the U.S. labour market. The central bank picture will remain more than likely neutral in Canada with a modest bias towards more cuts as we move towards year-end. September seems to be the consensus expectation for a possible 25-basis point (0.25%) rate cut by the Bank of Canada (BoC) with December noted as another potential cut. Meanwhile in the U.S., although the trade agreements clearly will play a crucial role in the Fed's decisions going forward, there is still a bias towards cuts similar to Canada. For now, our preference towards equities remains intact. So long as corporate earnings continue to grow and produce strong results, inflation stays within a reasonable range, and the U.S. consumer remains healthy, we do not see an overly compelling reason to deviate from this point of view at this stage.

JAY SMITH, CIM®, FCSI

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com