Opinions
Derek Warren A Comment -- General Comments From an Expert A Commentary COMMENT May 26, 2025
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We have the classic situation with the market climbing a wall of worry, and there's no shortage of things to worry about. Middle East rocket fire, suspension (but not cancellation) of tariffs, US budget bill. Nevertheless, the market trudges higher, buoyed with some support from corporate earnings but mostly by improving sentiment (waning fear and panic from April).
Over time markets make higher highs, punctuated by short and sharp drawdowns that test the mettle of investors.
Premium contentEquity risk premium compares earnings yield on the S&P 500 with bond yields, and the bond yields have been a bit lower in the past 3-4 weeks. Effectively, equities are yielding as much as bonds. Historically, over the last 3 decades, that's been a harbinger of fairly pedestrian returns over the next 12 months.
We can debate the economy and tariffs, but the starting point is that valuations for equities (particularly those south of the border) are expensive.
Absolutely. Valuations are a terrible indicator of short-term returns, but a very good indicator of long-term returns. In the short term, the market's a popularity contest. That contest can go on for a very long time.
If we go back to the tech bubble in the 1990s, Greenspan talked about "rational exuberance" in 1996 and the market didn't peak until almost 2000.
We're less than 2 weeks away from July 9, which is the 90-day reprieve from "liberation day". Who knows what will happen then? He has no idea how you strike trade deals in 2 weeks. There will be continued noise and friction within the whole system. We're seeing things slowing down.
He's not one for using what the economy does to predict what the stock market's going to do. It typically works the other way around. But here we are pretty much where we started the year for the S&P. The TSX is up nicely. Starting to feel as though a lot of the good news is baked in, so perhaps we might just pause for breath.
Initial reactions by markets to tariffs were very spiky. But we've gotten used to them now. Yes, some businesses will be impacted. But investors tend to think longer term. At some point we'll come through this and get on with our lives.
Not surprising, given the tariffs. We also saw a lot of pre-buying before tariffs took place. Expectations for May and June are also negative. So we'll probably have negative GDP growth for the quarter as a whole.
A softening, but not necessarily a recession, which is defined as 2 consecutive quarters of negative GDP growth. BOC has been on hold for the last 2 meetings. Arguably, if it were not for the potential impact that tariffs will have on inflation, they may have continued to cut. But they're on hold now so they can see the impact of tariffs.
Despite the negative number, stock markets have actually been quite healthy. TSX at all-time highs, and now US markets are hitting them too. That tells her that expectations are that trade deals will be announced, and they'll be manageable. Corporations will either adjust their supply chains or absorb some of the costs. Potentially not as inflationary as some expected. If so, and especially in Canada with its slowing economic growth and rising unemployment, that gives central banks more leeway to continue cutting interest rates.
Kind of moot. Trump administration has conveyed that if they're talking to the various trading partners, and they can't get a deal signed by that date, there will likely be extensions. Prime Minister Carney announced that Canada hopes to have a trade deal of some kind within 90 days, which would take us beyond July 9. She has the feeling that we'll see extensions.
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Yes, we really saw that in the apartment markets. Upon seeing the immigration numbers dip, a lot of American investors fled. His team actually likes apartments a lot here. The immigration blip will normalize, and residentials are a really great entry point here.