The first half of 2025 has been a rollercoaster for markets, marked by mostly positive market performance but significant volatility. Investors have faced a series of ‘noise’ including trade tensions, geopolitical risks, weak economic data, and deficit concerns. While these risks have rattled markets for short periods, they’ve consistently faded, leading to recoveries. Interestingly, these issues remain unresolved, and the market’s resilience may not last indefinitely. Here are the key takeaways for investors navigating this complex environment:

 

Key Themes and Lessons from H1 2025

1. Crises and Resilience

• Global markets have repeatedly shrugged off risks, recovering quickly from shocks like trade disputes and geopolitical tensions.
• The lesson: Avoid overreacting to headlines. A calm, measured approach has proven effective in managing portfolios.

2. Event-Driven vs. Economic Corrections

• Event-driven corrections (e.g., trade policy shocks) tend to resolve quickly, offering buying opportunities.
• Economic-driven corrections (e.g., global growth slowdowns) take longer to recover and require a more cautious approach.

Investors should differentiate between these types of corrections to make informed decisions.

 

 

3. Policy Uncertainty and Market Adaptation

• U.S. policy, particularly tariffs, has dominated headlines. For better or worse, markets have become desensitized to policy noise.
• Globally, supportive policies—such as Germany’s fiscal stimulus and China’s increased spending—have bolstered markets and dampened the potentially adverse impact of rising trade barriers.
• Central banks remain in easing mode, providing a tailwind for equities.

 

Outlook for H2 2025

1. Rising Risk of an Economic Growth Scare

• Economic data is softening, with weak sentiment and early signs of slowing consumer spending in the U.S.
• Unlike 2022, consumer savings from “the COVID era” are depleted. Job growth is slowing, raising concerns about the economy’s ability to withstand further shocks.
• The biggest increase in tariffs in 70+ years has so far not shown an adverse impact on the economy, but it is unlikely that this will stay the case.

 

 

2. Bond Market Dynamics

• Bonds delivered modest positive returns in the first half of 2025, as inflation remained subdued, employment trends continued to falter, and stable economic growth raised expectations for modest rate cuts from global central banks. 
• With effective yields in the 3.5 – 4.5% range for broad bond indices (FTSE Core Canada Universe, US Aggregate Bond Index), and real (inflation-adjusted) yields in positive territory for the first time since 2018, there is the potential for low single digit returns from bonds.
• Securitized debt (mortgage and asset backed securities), high yield and investment grade corporate debt, offer yields in the 5-6% range, which remains an attractive investment option while default rates remain near record lows. 
• The primary risk to bonds in the short term is continued fiscal recklessness from measures like the “Big Beautiful Bill” in the U.S. As gross government debt as a percentage of GDP continues to rise, investors are more prone to demand higher compensation in the form of higher yields for the risk of default or debasement.

 

 

3. Equity Market Dynamics

U.S. Equities: Resilient but facing challenges:

• Strong corporate earnings in Q1 have supported markets, but elevated valuations and narrow market leadership (dominated by big tech) continue to be of concern.
• Retail investors remain active, but foreign demand for U.S. equities is cooling. Interestingly, net-flows for US ETFs have been negative for the past three months, with an acceleration of net-selling over the past month. It’s not just Canadians who are going elbows up; that same sentiment is taking hold globally.
• In the first half of 2025, the US Dollar fell 5.64% against the Canadian Dollar, and 11% against a trade-weighted basket of global currencies (including the Euro, Yen and Renminbi).  After handily outperforming most global markets and delivering double digit returns from 2019 – 2024, U.S. Stocks (as measured by the S&P 500) are in negative territory in the first half of 2025 when measured in Euro, Yen and CAD$ terms. 
• We maintain a slight underweight to U.S. equities versus global benchmarks due to stretched valuations and narrow leadership

 

Canadian Equities: Moderation expected:

• The TSX has performed well, driven by materials (particularly gold) and financials, but further upside may be limited without a boost from energy stocks.
• Bank valuations are stretched above historical averages, and economic uncertainty with the U.S. adds caution.

 

 

 

International Equities: Attractive opportunities:

• European and Asian equities have outperformed, supported by fiscal stimulus, resilient economies, and more reasonable valuations.
• Though valuations in Canada and international equities are currently at one-year highs, they remain at least somewhat in line with long-term averages, trading at a 7% and 5% premium, respectively. Valuations are a key factor dictating potential future returns.
• International diversification is paying off, and we expect this trend to continue.

 

 

Emerging Markets (EM): Constructive outlook:

• EM economies benefit from easing monetary policy, a weaker U.S. dollar, and attractive valuations.
• While tariff impacts pose challenges, the long-term growth potential remains intact.

 

4. Real Asset Dynamics

• Real assets like infrastructure, real estate and commodities offer the potential for diversification benefits to traditional asset classes like bonds and stocks.
• Absolute return strategies and non-traditional assets like private equity, private credit and direct lending can further round out the mix, though their complexity and lack of liquidity make these non-viable options for many investors. 

 

 

Final Thoughts: Portfolio Positioning and Strategy

The first half of 2025 has reinforced the importance of staying disciplined and avoiding knee-jerk reactions to market noise. Uncertainty will remain a dominant theme for the rest of 2025. We continue to prioritize high-quality bonds, dividend-payers, and other diversifiers, ensuring flexibility to pivot as needed. Narrow market leadership in the U.S. continues to limit broader upside, emphasizing the importance of diversification. As economic growth shows signs of softening, we’re leaning on defensive assets while maintaining equity exposure to capture potential opportunities. Given the market’s tendency to overreact to both positive and negative news, a balanced approach remains essential.