Our partner, Cumberland Private Wealth, has prepared an exclusive Quarter-End report (Dated: March 17, 2025) on the current market volatility following recent geopolitical events.
Provided by: Cumberland Private Wealth
We’re writing to provide a brief update on the current market dynamics following recent geopolitical events and the resulting volatility. While we’re finalizing our Quarterly Strategy Reviews (coming by April 4th) and various issues continue to evolve, we’re pleased to share a few observations on what we’ve seen so far and how we’re thinking about positioning and portfolio risks.
In addition, our full quarterly Investment Review Meeting will take place on April 16th, at which point we should have greater clarity on the impacts of key macroeconomic and political developments. More specifically, the outcomes of U.S. tariff negotiations, the evolving political situations in Ukraine and the Middle East, and the Canadian political landscape all have implications for our own economy, economies around the world and financial markets, and these further inform our outlook.
1. Markets have been recalibrating – all part of a healthy process for now
After a strong two-year run, markets are digesting a new set of risks. While the S&P 500 is down about -10.3% off its highs and down -4.1% since the end of 2024, we don’t see this type of pullback as unusual, although it should be viewed in the appropriate context. Historically, even years that ended positively for equity markets experienced intra-year pullbacks—on average around -14% for the S&P 500*, as one example.
We’ve also seen signs of sector rotations, away from the high-growth Technology companies that have dominated the US market’s performance for the most part. In 2024 and 2023, the so-called “Magnificent Seven” Tech stocks accounted for a significant share of S&P 500 returns, at 55% and 63%, respectively.** But so far in 2025, market leadership has shifted. As of March 14, 2025***, the Technology sector within the S&P500 index is down year-to-date (-9.3%), while sectors like Health Care (+5.4%), Energy (+4.9%), Utilities (+4.2%), Materials (+2.3%), Real Estate (+2.0%), and Consumer Staples (+1.9%) have all moved up. Also contrast the NASDAQ Composite down -7.9% to the TSX which is only marginally down at -0.2% year to date.
These kinds of rotations can be constructive, signaling healthier market dynamics in due course, and new opportunities beyond the past two years’ concentrated investments.
2. Economic data is sending mixed signals
Recent soft data—such as declining consumer sentiment and housing starts in the US —has caught the headlines. But when we look at the full picture, the core economic indicators remain quite healthy.
- In the U.S., Q4 2024 GDP was revised up to +2.3%, and the unemployment rate remained low at 4.1% compared to a long-term average of 5.7%, both of which indicate good baseline levels and economic strength****.
- In Canada, real GDP growth for Q4 2024 came in at +2.6%, up from a revised +2.2% in Q3. This shows that to date, the Canadian economy has been resilient.*****
3. Despite the trade threats, we see a slowdown but not a recession
One of the most closely watched risks is the potential for a full-on trade war between Canada and the US, particularly if broad-based tariffs are officially enacted. The Bank of Canada’s Monetary Policy Report (See the Chart below) modeled a base-case scenario in which both the U.S. and Canada implement +25% tariffs on all imported goods, among other less negative scenarios. Here is a quick picture of the possible economic impacts vs. a no-tariff scenario.
Estimated Real GDP (top) & CPI Inflation Impacts (bottom) for Canada*****
Even in this punitive +25% across-the-board full retaliatory tariff scenario, Canada’s GDP would slow materially, but the economy would not contract into negative territory. As the above chart shows, under this scenario, Canada’s estimated GDP growth would fall to +0.1% from +2.6% in Year 1, then move up to about +1.1% in Year 2, and rebound to +2.6% by the end of Year 3. *****
According to this same analysis and as can be seen above, inflation would likely increase by about 1% cumulatively over the three years, but not to any disruptive levels.
Given these scenarios, current economic conditions, certain assumptions, and the potential for further interest rate cuts, we do not see the Canadian economic landscape as weak as many perceive. Slower economic growth or no growth could occur, but the outlook doesn’t appear to be unreasonable, all things known today.
4. Earnings and valuations are improving
Solid corporate earnings growth in 2024 and early 2025 continue to support equity markets. S&P 500 earnings rose +14% year-over-year in Q4—well above the long-term average—and Canadian and international corporate earnings estimates have also been revised higher. Alongside the recent market pullback, this helped moderate valuations.
More specifically, Forward Price Earnings (P/E) ratios for the next 12 months have come down modestly across the major indices: S&P 500 is now at 20.5x, TSX is at 14.7x, and EAFE (International) is at 14.6x. ***** Simultaneously, forward earnings revisions have been positive providing valuation support despite the present uncertainty.
5. We’ve become more cautious—but not bearish
Given the evolving macroeconomic backdrop, we’ve taken some steps to reduce risk by selling and trimming investments with weaker market Technicals, Fundamentals and/or less compelling valuations, raising cash levels to around 7% in our 100% capital appreciation portfolios. We generally remain constructive and do see upside opportunity, particularly among companies with earnings resilience and relative valuation support.
In summary, while we’re closely watching how tariff negotiations further evolve, the data suggests that, even in a downside scenario, Canada’s economy is likely to slow, but not necessarily contract across the board. In addition, we are watching the impacts of Trump 2.0 on several other fronts – tariffs beyond our borders, Ukraine / Middle East wars, and other fiscal policies yet to come. These perspectives have shaped our current portfolio positioning: for now, we remain cautious, but we are not bearish.
*Source: Raymond James, **Source: Fact Set, Standard & Poors, J.P. Morgan Asset Management, ***Source: S&P Global and Bloomberg Markets, ****Source: Ycharts.com and US Bureau of Economic Analysis (BEA), ***** Source: January 2025 Monetary Policy Report, Bank of Canada and and Bloomberg Markets.