Insights and Strategies
The tariff threat train continues to roll
Macro Highlights for February
- The Canadian economy was stronger than expected in the fourth quarter of 2024. Annualized q/q growth came in at 2.6%, while the third quarter’s growth was also revised to 2.2%, up from the initial estimate of 1.0%. On an annual basis, real GDP growth is forecasted by the BoC in the January outlook to be 1.8% in both 2025 and 2026 (down from 2.1% and 2.3%, respectively, in the October outlook), but up from 1.3% in 2024. The improvement over 2024 can be partially attributed to the easing of monetary policy (lower interest rates) by the BoC that stimulated both consumer spending and business investment, and increasing export capacity for oil and gas. The reduced outlook however, versus the October report, can be partially attributed to government policies implemented to slow population growth.
- The U.S. economy finished off the fourth quarter of 2024 with annualized q/q growth at 2.3% q/q, and 2.8% for the full year, down only slightly from 2.9% in 2023. This is a very solid growth rate and continues to be supported by the U.S. consumer. We expect this above-average growth to continue, but at a slightly weaker pace, at 2.4% for 2025, and then 2.2% for 2026. Government investments are expected to further support that growth as the majority of the stimulus money committed under various programs (IRA, IIJA, CHIPS) has still yet to be spent.
- The Atlanta Fed’s GDPNow forecast, which provides a running estimate of real U.S. GDP growth based on current economic data, has sharply declined to -2.8% for 1Q25 due to a surge in imports. Businesses have reacted to tariff threats by front-loading imports and increasing inventory levels. This will lead to noise in the official results, when announced, but should be understood as an exceptional or one-time impact.
Financial Markets in February
- In February, the TSX Composite, Canada's main stock market index, recorded a -0.5% price return and -0.4% total return. Meanwhile, the U.S. large-cap benchmark, the S&P 500, saw a larger decline with a -1.4% price return and -1.3% total return, all in local currency. YTD returns to February 28, were +3.1% for the TSX Composite and +1.4% for the S&P 500.
- U.S. 4Q24 earnings season is coming to a close with strong EPS growth of 17%, above expectations, although guidance for 2025 has been somewhat underwhelming as companies are remaining generally cautious in this uncertain environment and 2025 EPS expectations are being revised down. 1Q25 EPS growth is now expected to be 8% versus 14% before earnings season. A rotation however is unfolding, with capital flowing into cheaper market segments, particularly those demonstrating steady earnings growth. With two-thirds of Canadian companies, representing 84% of the market capitalization, reporting, 57% had EPS beats in 4Q24, with growth of over 10%.
- Tariff threats disrupted the TSX Composite's performance in February. Unlike January, when cyclical sectors outperformed defensive ones due to an improved economic outlook, February saw better performance from sectors that are more services-oriented or have stronger defensiveness amid the tariff threats. Utilities, Materials, and Info Tech are the three sectors we consider more insulated from the tariffs and benefiting from stronger sector-specific tailwinds.
Upcoming
- We expect further threats of tariffs throughout the year, with the next big wave of announcements on April 2. We also expect a push to accelerate the renegotiation of the USMCA trade agreement, from its current mid-2026 timetable, towards the goal of setting a new playing field.
- Notwithstanding the disruptive aspects of tariffs, our overarching expectations are for equity markets to move higher in 2025, on the back of the positive economic and corporate profit backdrops, but with more muted gains than the 20%+ returns of the last couple of years. We also expect heightened volatility, which could include multiple pullbacks along the way. Our (U.S. Investment Strategy Group’s) S&P 500 target to the end of 2025 is 6,375 using 23.5x EPS of US$270, with a preference for Technology, Industrials, and Health Care. For the TSX Composite, we forecast 26,300 by year-end for an 8.5% total return in 2025.
- The next BoC meeting is March 12. We expect a 25 bp rate cut to 2.75%. After that, the next meeting will be on April 16, when we are expecting another cut to 2.50% and the release of the updated Monetary Policy Report. The Fed is likely to cut more slowly while economic growth remains strong, the unemployment rate remains low, and inflation data in January was hotter than expected. We still expect to see 25 bp cuts mid-2025 and towards the end of the year, to bring the U.S. policy rate down to 4.00%.
