Points in Time – July 2025 – ISSUE
Scott Blair, CFA
Head Portfolio Manager
Recently, I had the privilege of presenting to a valued, longstanding Foundation client where we focused on the significant changes unfolding in the U.S. and challenges facing the global economy. Perhaps, surprisingly, when we shifted to discussing markets, my tone became more optimistic.
One participant posed an insightful question: “How can we have weak economic growth and strong markets?” The answer, as always, lies beneath the headlines.
2025 has had it all
Outside the pandemic, it’s hard to recall a more eventful start to any year than we’ve had in 2025. Volatility, uncertainty, and policy whiplash have dominated both quarters, and show no signs of abating. Here’s a snapshot of some of the goings-on:
Policy and politics
- New leadership in both Canada and the U.S., with Mark Carney promising the most significant transformation of Canada’s economy since WWII
- Multiple tariff hikes to start the year, culminating with the U.S. increasing tariffs in early April to their highest levels in over 100 years
- After bond and equity markets panic, the U.S. pauses the April increase to allow negotiations, leaving the U.S. effective tariff rate at its highest level since 1939
Inflation and central banks
- Despite tariff increases, an anticipated rise in inflation has remained subdued – at least for now leading the Federal Reserve Board to leave interest rates unchanged, while most other developed markets cut rates
- Trump repeatedly threaten to fire the Federal Reserve Board Chair, Jerome Powell, for not cutting rates, stirring further uncertainty in monetary policy
“ It may seem counterintuitive that strong stock markets can occur even when uncertainty is high and economic growth is slow, but it happens all the time.”
Geopolitics and currency
- The U.S. bombed Iranian nuclear sites; oil prices spiked briefly then quickly stabilized
- The U.S. dollar weakened against most major currencies, including the CAD, despite higher rates and global turmoil
These developments have compounded into a uniquely volatile environment. The uncertainty, along with the adjustment period needed to absorb higher tariffs, has had a meaningful impact on growth expectations. For instance, economists now expect Canada’s GDP will rise by 1.3% this year, down from an expected 1.8% increase to start 2025. Other developed nations are seeing similar downward adjustments.
Earning through the noise
It’s often said that markets hate uncertainty, yet the first half of 2025 was very strong for global markets. Even the epicenter of turmoil (the U.S.) saw positive returns although they lagged Canada and Europe. It may seem counterintuitive that strong stock markets can occur even when uncertainty is high and economic growth is slow, but it happens all the time. That’s because markets are forward looking. They react to expectations of what is ahead and, in the world of markets, little is as important as earning expectations.
Figure 1 highlights the tight correlation between earnings growth and market returns. The two move in tandem and its rare for either to contract for long outside of recessionary periods (such as 2000, 2008 and 2020). We can see that periods of recession virtually always lead to market (and earnings) downturns that tend to be longer lasting (the pandemic excluded). Other downturns tend to be less severe in nature.
Current expectations for earnings are strong through 2026 despite weaker expected economic growth and turbulent times. Some reasons for the positivity include increasing productivity from Artificial Intelligence, leading to operational leverage, lower interest rates and increased fiscal spending.
What this means for investors
As we enter the second half of 2025, we expect volatility to remain elevated as politics, policy shifts, and geopolitical risks continue to dominate the headlines. But beneath this noise, long-term fundamentals will still drive value. As investors, we know that discipline, adaptability, and focus on what matters most will continue to separate signal from noise and opportunity from distraction.
Source: FactSet
Canada
Gil Lamothe, CFA
Senior Portfolio Manager
Watching
The S&P/TSX Composite Index began the second quarter of 2025 by falling nearly 10% in eight days in reaction to President Trump announcing global reciprocal tariffs. As this shock wore off, the Canadian market began a steady recovery, finishing the quarter up 8.5% (see figure 2). Gold price appreciation, and a strengthening Canadian dollar were among the drivers to the positive recovery from April lows.
Given the broader economic concern with tariff s, both the technology and consumer discretionary sectors had generated lackluster returns in Q1 2025 and into the first few days of April. However, both sectors were up ~14% in Q2 as fears around economic stability and consumer spending subsided. Market darling, Celestica, was up over 80%, while Canadian Tire Corp was up 25.5% after reporting favourable earnings with stronger than expected organic growth across all segments.
The financials sector was another strong contributor to market performance in Q2. Making up over 30% of the TSX benchmark Index, it was up 12.1% in the quarter. Canadian banks are beginning to indicate that they’ve seen the worst as far as credit losses go, and as such, their stocks performed quite well. The leaders this quarter were TD Bank, up 17.7%, and CIBC, up 20.6%.
Figure 2: S&P/TSX Composite Index recovers by end of Q2
Thinking
Global economic uncertainty remains elevated and despite the consumer discretionary sector in Canada performing well in the quarter, we remain cautious on consumer health and discretionary spending. We are encouraged to see that high interest rates are likely behind us, and though we now must deal with the probable effects of tariff s, we are doing so from a strengthening position. That said, there are a number of quality, resilient businesses in Canada that should continue to generate acceptable returns through a wide range of economic conditions. Examples include the energy infrastructure and utilities sectors, which have minimal exposure to consumer spending, tariffs, and commodity price fluctuations.
Service-based businesses also have less direct exposure to U.S. tariffs and have performed well over the quarter. Stantec (STN), an engineering firm, reported stronger than expected organic growth and margin expansion in the quarter, driving a return of +24.4% in Q2. Element Fleet (EFN) was also up 19.7% in the quarter after reporting good results on both revenue and cost-reduction initiatives. Element Fleet continues to demonstrate the relative resilience of their business and is navigating this environment quite well. Tariff-related risk and an increasingly uncertain macro-outlook increases the complexity for companies to manage their vehicle fleets, leading them to explore Element’s value proposition.
Doing
While the market’s initial sharp drop in Q2 was somewhat worrisome, it allowed us to purchase quality companies at a reasonable price. We took the opportunity to add to our positions in Shopify, TFI International, CCL Industries and Methanex in our Canadian portfolio. In our dividend portfolio, we added to Methanex, CN Rail, Canadian Natural Resources, and Suncor.
On the selling front, we trimmed our Agnico Eagle position in both portfolio strategies and sold some Nutrien from the dividend portfolio. Both stocks had performed well, and their weights had become high enough that some trimming was in order. We also shifted our positioning between CIBC and TD, increasing our target weight in CIBC and decreasing that of TD Bank. Though TD’s stock price has performed well, it’s still recovering from the money laundering penalties imposed on them in the U.S. and will continue to do so for some time. CIBC has been executing very well and currently has better dividend growth metrics than TD.
Despite all the negative news this year, the equity market continues to deliver impressive results which shows the value of staying invested even in uncomfortable times.
Source: Bloomberg
“There are a number of quality, resilient businesses in Canada that should continue to generate acceptable returns through a wide range of economic conditions.”
Q2 2025 Dividend Performance Summary table
Canadian Dividend Portfolio
| Number of companies in the equity portfolio | 31 |
| Number of companies that declared an increased dividend | 18 |
| % of companies that declared an increased dividend | 58.1% |
| Weighted average of dividend increase | 2.38% |
| Consumer Price Index increase (YoY*) | 1.70% |
| Equity portfolio dividend yield** | 4.12% |
| S&P/TSX dividend yield | 2.96% |
Top 10 Dividend Growers
| Enghouse Systems Ltd | 15.40% |
| Brookfield Asset Management | 15.10% |
| CCL Industries | 10.30% |
| Manulife Financial Corp | 10.00% |
| Intact Financial Corp | 9.90% |
| Brookfield Renewable Corp | 5.10% |
| Canadian National Railway | 5.00% |
| Sun Life Financial Inc | 4.80% |
| Canadian Natural Resources | 4.40% |
| Royal Bank of Canada | 4.10% |
* Estimate from Statistics Canada May 30, 2025
** The dividend yield is based on the Leon Frazer Canadian Dividend Fund using the target weight for cash. Dividend performance numbers are year to date and express growth statistics only. These are not rates of return (as with the other portfolios).
Source: CWB Wealth
U.S.
Liliana Tzvetkova, CFA
Senior Portfolio Manager
Saket Mundra, CFA, MBA
Senior Portfolio Manager
“Irrespective of the bull and the bear markets, there are always opportunities.”
Watching
The S&P 500 ended the second quarter at all-time highs, recovering completely from the sharp sell-off experienced earlier in the year. The market showed remarkable resilience despite negative headlines around tariffs, fiscal imbalance, geopolitics and wars. The recovery was led by sectors such as technology, communication services and industrials, while energy, healthcare and real estate were the worst performers. A temporary pause in the implementation of reciprocal tariffs by the U.S. fueled the current rally, which was amply aided by continued strength in secular themes like Artificial Intelligence investments. Hopes around lighter regulations for banks and financial institutions led to a bid for stocks in the financials sector. Announcements such as the launch of JPMorgan’s deposit token, JPMD, and the Senate’s passage of the Genius Act sparked market enthusiasm and were seen as signs of things to come.
Recently, market sentiment has been shifting between optimism and fear with regards to the reciprocal tariff deadline, which was extended to August 1, 2025. Whether the current rally continues or falters may depend on the upcoming earnings and how companies continue to navigate the chaotic environment that we have been experiencing.
Thinking
Over the years, we’ve seen extreme reactions by market participants to any bout of good or bad news. The steep sell-off in March and April – and the subsequent recovery – are proof of this behaviour. While erratic, this behaviour creates opportunities for fundamental investors who can apply a disciplined process to discern truth from the tension.
Irrespective of the bull and the bear markets, there are always opportunities. One of the more challenging aspects of portfolio management is to see long-time underperforming holdings start performing after they’ve been sold. We’ve seen this recently with Dollar General. The flip side is to see great portfolio performers start to lag. For example, UnitedHealth Group, the largest U.S. health insurance company, lost ten years of outperformance against the S&P 500 Index within just a month. Such moments test our patience and conviction as investors. But these instances also force us to take a fresh look at our analysis to determine whether a new opportunity is presenting itself.
One of our holdings, McKesson Corporation, faced such issues several years ago and our portfolio benefited greatly from the market’s overreaction by sticking to our disciplined approach (see figure 3). Could UnitedHealth Group offer a similar opportunity? Only time will tell.
Figure 3: McKesson surpasses S&P 500 total returns (indexed) since initial purchase
Doing
During the quarter, we made few changes in the portfolios but took advantage of the correction in early April to add to our positions in Amazon, Fabrinet, Occidental and Intel. We also finished in-depth research on new names like Meta and added them to our ongoing watchlist, so that we’re ready to act quickly if, and when, a risk-reward opportunity arises.
We also conducted an in-depth review of our position in health insurance companies such as UnitedHealth and Elevance. These stocks have been amongst the worst performing ones in the index on a year-to-date basis. Based on our due diligence, we believe the current issues could be temporary and fixable. Having done the research, we stand ready to take advantage as the risk-reward becomes more lucrative.
Staying disciplined when things are not going our way has been central to our team’s approach and is essential for long-term success.
Source: FactSet, CWB Wealth
International
Ric Palombi, CFA
Senior Portfolio Manager
“Within global markets, European markets (as defi ned by the Stoxx Europe 600 Index) outperformed the U.S. by the biggest margin on record in dollar terms.”
Watching
While the first half of 2025 has been characterized by abnormal geopolitical volatility like tariffs and conflict in the Middle East, global markets have remained resilient. Currency markets highlight a different story though, with the U.S. dollar weakening by 10% on average against its peers – its biggest first half loss since 1973.
Within global markets, European markets (as defined by the Stoxx Europe 600 Index) outperformed the U.S. by the biggest margin on record in dollar terms. Even European bond markets have fared reasonably well with German bunds (a type of bond), outperforming treasuries since April despite the German government leveraging up its balance sheet. Investors are concerned about the inflationary impact of President Trump’s tariff and tax cut policies amid an expected widening in the budget deficit.
On the other hand, while Europe is boosting fiscal spending thereby improving its growth prospects, the European Central Bank (ECB) is slashing interest rates. On top of this, relative valuations in Europe remain depressed while investor positioning is still low. These factors provide an effective value proposition for diversification as well as continued positive performance of European and International markets.
Not all is rosy on the continent. The UK markets and assets, where the International portfolio is actively underweight, have come under pressure recently as doubts grow about Britain’s finances.
In China, there have been recent trickles of positive data points including consumer sentiment and the Caixin PMI. On the trade front, both the U.S. and China appear to be inching closer to an understanding. China continues to have ample room on its balance sheet to provide required stimulus. Recent discussions have centered around supply-side cuts to counter deflation. Consumer measures include voucher handouts to spur demand.
In other parts of Asia, South Korea is debating Japan-like corporate reforms that could reduce the “Korean discount”. Japanese markets have been underwhelming due to continued delays in reaching a trade deal with the U.S.
Emerging markets’ performance, including Brazil, has benefited from a weaker U.S. dollar. Policymaking is expected to move more center as the October 2026 elections get closer, easing concerns over the country’s fiscal direction, while the Central Bank is expected to enter a rate easing cycle starting Q1 2026.
Figure 4: European stocks outperform U.S. peers in Q1 & Q2 2025 jpeg
Thinking
The International pool has exposure to various top-down themes benefiting from positive market narratives. These include:
- European Banks, clocking their largest first half gains this century
- China consumer
- Tech/AI
- German Infrastructure exposure through stocks like Heidelberg Materials
- Emerging Markets exposure through Banco Bradesco in Brazil
- Lowly valued European mid-caps such as LANXESS Chemicals
- European domestics like RTL (the German equivalent of Netflix)
- Korean market reform beneficiaries: Hyundai Heavy Industries (shipbuilding) and Samsung Electronics
- Sectors that benefit from lower rates such as utilities and telecoms
We believe the International portfolio has the right balance of diversification and exposure to important top-down themes as well as bottoms-up stories, including turnarounds and special situations. In addition, our focus on value provides a good platform for the pool to continue providing a healthy risk-reward balance.
Doing
Our trades, which aim to improve the return profile of the fund, included adding to Elis SA, Infineon, Samsung, Galaxy and Rémy Cointreau while selling down Bunzl plc.
One name we’d highlight this quarter is Sony, which operates in the gaming, music, imaging sensors, consumer technologies and movies segments as well as having a finance division. Sony’s returns on invested capital, which have gone through various phases, are poised for a turnaround towards the mid-double-digit range. Catalysts include gaming revenue shift to software, higher pricing on its gaming offerings, shareholder payouts and potential divestment/spin-offs of non-core segments such as finance and imaging sensors.
Source: Bloomberg
Fixed Income
Malcolm Jones, MBA, CFA
Senior Portfolio Manager,
Fixed Income
Ric Palombi, CFA
Senior Portfolio Manager
Watching
In the second quarter, the yield curve steepened slightly. Longer yields increased somewhat while shorter yields were substantially anchored. The Bank of Canada is still expected to cut rates once or twice by the end of the year, though there’s uncertainty about when said cuts will happen. The central bank is keeping a close eye on how trade disruptions could play out. They could be inflationary, or maybe slow things down, leading the central bank to be overly cautious in making changes to the bank rate for now.
Credit spreads widened out over the first quarter then narrowed over the second quarter, so they’ve barely moved year to date. This suggests the bond market does not see an excessive risk of there being an economic downturn right now.
U.S. tariff policy has been almost whimsical in nature. But this uncertainty makes it much more difficult for nations to establish trade agreements – and even harder for corporations to do so. The extent of the trade barriers is unknown, as is the length of time that such agreements would hold. This pressures companies to postpone investment, having an unknown effect on bond yields. On the one hand, uncertainty tends to push yields up. On the other, lack of investment (and therefore lack of demand to issue bonds) tends to push yields down.
National debt is set to increase in the western countries. Increased military spending pushes debts, and therefore yields, upwards. We saw some of this during the second quarter. This effect has been well telegraphed to the market, suggesting that the market has substantially priced in this increased national debt.
“Credit spreads widened out over the first quarter then narrowed over the second quarter, so they’ve barely moved year to date. This suggests the bond market does not see an excessive risk of there being an economic downturn right now.”
Figure 5: Year-to-date spread in 10-year Corporate A bonds
Thinking
We think the yield curve will probably look much the same at year’s end as it does now. While we saw benchmark bonds have a slight negative return for the second quarter, we feel they are well placed to generate a fair return for the full year. We still expect higher than normal day-to-day volatility due to current geopolitical uncertainty and disruptions to global trade. We also feel that the daily ups and downs will cancel each other out over the course of months. Given that we anticipate muted overall movement in the yield curve, we are content holding a slightly longer duration in an effort to capture some extra coupon income.
Investment grade credit spreads have moved wider and narrower, and we expect this pattern to continue for some time (see figure 5). Spreads are currently at the lower end of their historical range, and we expect them to have limited net spread movement over the course of the year. This is consistent with our opinion that any economic pullback will likely be limited in scale. Given modest spreads, we feel there will be limited opportunities for outsized capital gains in credit bonds. We continue to hold an overweight position in credit bonds in anticipation of capturing extra coupon income.
We have seen some disruptions in distressed bonds. At this point, concerns seem to be company specific, and we do not currently anticipate any spillover into higher quality bonds.
Preferreds had a good second quarter. They benefited from both an attractive coupon and a low duration, which offered some extra gains as short yields fell.
National debt levels are increasing across developed nations, primarily due to increased military spending. This has placed some upwards pressure on longer-term rates. We do not anticipate further spending increases, so additional upward pressure seems unlikely.
Doing
We continue to hold a slightly longer than benchmark duration. We continue to hold an overweight position in credit. In both cases we expect to capture increased interest income.
Source: Bloomberg