March 2025 Monthly Market Insights

U.S. markets faced increasing volatility in February as investors were concerned about the impact of disruptive policies on growth and inflation. Areas that surged initially upon Trump’s election win reversed course, with cryptocurrency, Tesla, and the S&P 500 Index turning negative on year-to-date basis. Weaker-than-expected economic data also weighed on the market, as the Economic Surprise Index plummeted into the negative region, consumer confidence dropped significantly, retail sales disappointed, and business investment stalled. Additionally, the Department of Government Efficiency (DOGE), implemented massive firings of federal employees that added further strain to labour market expectations. The U.S. Policy Uncertainty Index surged, underscoring growing concerns over legislative gridlock and uncertainty around federal spending priorities. The administration issued numerous tariff threats to its closest trade partners, raising concerns on the inflationary risk while hurting growth. The Federal Reserve remained divided, with some officials pushing for rate cuts to counteract slowing growth, while others remain cautious due to persistent inflation risks.

Compounding these concerns were debates over potential deregulations in key industries, including technology and energy. This created additional market anxiety. Investors grappled with mixed signals from policymakers, making it increasingly difficult to assess the near-term economic outlook.

Bottom line: Rising policy uncertainty, weakening economic data, and fiscal austerity measures could prove detrimental to growth and investor sentiment. This is especially worrying at a time when U.S. valuations remain near historical highs. Investors need to remain vigilant in diversifying to more reasonable segments of the market, and to other regions with growth and more reasonable valuations such as Europe and Canada.

Source: Bloomberg

Canada reported surprising strong GDP growth for Q4 of 2024 on the back of strong consumption, and residential and business investments. The GDP per capita growth was the strongest in seven quarters, as rate cuts were successful in stimulating the economy thus far. The imposition of 25% tariffs poses a serious threat to the Canadian economy, and may plunge it into a mild recession if the tariffs are not lifted. However, the TSX would likely be more resilient and less impacted by tariffs than the Canadian economy. Earnings growth in Canadian companies are recovering well in the coming quarters. The Canadian market’s heavy exposure to energy, materials, and financials also makes it less sensitive to short-term trade disruptions, helpful in weathering the tariff storm. The banking sector is well capitalized and provisioned, and companies with foreign currency revenues would also benefit from a weakening loonie. Additionally, Canada has one of the lowest fiscal deficits in the G7, giving the federal government the ability to provide targeted fiscal support to affected industries, or more directly to consumers. Concerns about mortgage renewals, which had previously been a headwind for Canadian consumers, appear to be overstated. Rising household savings rates and stable employment levels have provided a financial buffer, alleviating fears of widespread financial distress.

The BoC is still expected to cut rates two more times this year, but has room to cut more aggressively to support growth if needed. However, this would further widen the rates gap between the two countries, resulting in further weakening of the loonie.

Bottom line: With ample dry powder in fiscal and monetary policy, and improving export conditions with a weakened currency, Canada’s economy has the ability to deal with the tariff threats. The impact on the TSX might even be smaller, since the heavyweights like energy, materials, and financials are less impacted by tariffs. Canadian fixed income and equities remain attractive with prospects of two more rate cuts, strengthening earnings growth and reasonable valuations.

Source: Bloomberg

European markets continued to outperform North American equity markets in February, bolstered by strong corporate earnings, favorable trade agreements, and resilient consumer demand. The U.S.-Ukraine minerals agreement provided a significant boost to industrial and materials stocks, particularly in construction, infrastructure, and semiconductor supply chains. Leading European firms, including luxury and consumer goods companies such as LVMH and Richemont, also posted better-than-expected earnings, reinforcing optimism about the region’s economic trajectory.

European Central Bank (ECB) policy expectations also played a key role in driving investor sentiment. With inflation moderating, the ECB is expected to continue to ease rates later in 2025, which could further support rate-sensitive sectors such as real estate and utilities. Additionally, European equity valuations remain attractive relative to U.S. markets, as earnings growth continues in several sectors. This valuation gap has drawn increased interest from global investors seeking opportunities outside the U.S.

European stocks surged in 2025, driven by improved sentiment on growth

Source: Bloomberg.

Beyond Europe, emerging markets are also showing signs of stabilization, particularly in China. Lower-than-expected U.S. tariffs and advancements in artificial intelligence have fueled optimism in China’s technology sector, which has been a key driver of recent gains in Asian equities. While geopolitical concerns and secular challenges persist, selective opportunities in China’s IT and consumer discretionary sectors are gaining investor attention.

Bottom line: In a highly uncertain regime which will reward diversification, Europe offers a compelling investment destination, supported by strong earnings, central bank easing prospects, and favorable valuations. Selective opportunities are also available in emerging markets with favorable valuations and growth.

Data and opinions as of February 28, 2025.