David Driscoll A Comment -- General Comments From an Expert A Commentary COMMENT May 14, 2025

About 1/3 of S&P earnings are in the bank already. Couple of things to note. First is that companies that are beating are beating by a bit more than estimates, but fewer companies are beating. 

Also, when you take out big tech, and specifically anything that has some kind of link to AI capex, there's no real earnings growth. When you look at nominal growth, sales overall are up 3-3.5%, and that's roughly equivalent to inflation. So if a company is raising prices at about the rate of inflation, if it's growing it should be growing sales at a faster rate than that. It tells you the economy's slow on a broad basis beyond what's happening in AI.

He goes back and looks at the dot-com bubble. In December 1996, Greenspan was early with his comment about "irrational exuberance" and the market kept going for 3.5 years before it peaked out. Nobody can time this. 

What we do know is that we're early in AI adoption as the next phase of tech and productivity growth for the world. It's a very bullish theme. But what do you pay for that today, and what's the catalyst to upset that? A few months ago the catalyst was tariffs, but now the market's not so worried about them. The next catalyst might be higher for longer; if they're going to run the economy hotter, then rates might just stay up. The market multiple should not be expanding in that environment, but so far multiples have held up.

We just saw some new headlines of the new need to fund debt and deficits. The cost of that debt is big. Looks as though the estimate is a bit below consensus, so that's a slight positive. So they either expect more revenues from tariffs, or they expect less spending somehow. We'll find out Wednesday morning how they're going to fund that -- are they going to fund it with bills (as the president wants) or are they going to issue more coupon debt (which has a negative implication for risk premiums)?

We have the Fed on Wednesday. They're not going to move on rates, but do they signal in their dot plot that they'll begin to cut rates later this year? Two reasons to cut rates:  the economy is slowing and labour market is starting to weaken (some signs of that), or inflation is well contained (and we still don't know this piece yet). 

We get the PCE (Fed's favourite inflation gauge) this week. We have yet to see any real transmission of higher costs from tariffs. That's still coming because even though there's a deal with Europe, there's a tariff. The tariff rates are going to be mid-high teens from all the estimates he's read. A lot of revenue from tariffs, but how much is going to get into consumer prices at the end of the day? It'll take months and months to find out. 

Good case to be made that the Fed should be on hold until we see the labour market or the consumer really start to weaken. Typically, those start to line up together when people start losing their jobs.

It comes down to different styles. When BMO writes their options, they're writing a bit further out of the money so you get a bit more capital appreciation. The Hamilton style is writing more of the portfolio closer to the money, which increases your yield but limits your upside. 

If you're really bearish, the Hamilton ones are a little bit better because they'll generate more income. If you're bullish but you need the income, then the BMO ones will probably give you a better experience because you're giving up less of the upside.

If you can positively tell him what the market's going to do over the next year, he could tell you which one will outperform. In general over time, since markets go up more often than not, he'd expect the BMO ones to provide a bit better performance.

When you're investing in corporate bonds, you're investing in the spread of that bond over the government equivalent in terms of interest rate risk. Whether it's the 1-, 5-, or 10-year corporate, it's the additional yield (the credit spread).

Credit spreads have been very narrow. Here's the rule of thumb everyone should use:  when equity markets hit their peaks, credit spreads are at their narrowest. Not a good time for new investment in corporate bonds. Much better to put $$ into government bonds at that point. Because when equities correct, government bonds do better and credit spreads widen. So the corporate bond will underperform when equity markets are correcting. 

When equity markets have finished their correction (down 5-15% or whatever), that's a better time to own corporate bonds because the credit spread will narrow. And that's really what you're playing when you're investing in corporate bonds.

Bonds are less correlated with the ups and downs of the world. But when you're in an inflationary environment, bonds don't give you the same protection that they once did during the disinflationary environment we were in for decades. We're in an environment where inflation will be a bit more persistent than it's been for the last 40 years, so typically bonds will underperform equities. 

If we get stagflation (no growth, but inflation) that's bad for all assets.

No, it's stock-specific. AZN reported a beat and raise today, for instance. So is Novartis. Gilead in the US is holding on well.

Precisely. This has got to be one of the most-hated rallies of all time. Since 2019 we've faced a global pandemic, war, inflation spikes, rates hikes, tariff tantrums, and widespread geopolitical instability. Yet global economies remain resilient and robust, while investors are reluctant to embrace this rally. Strange.

Particularly in Canada, the word "tariff" is hitting home. He believes the skepticism is misplaced, as there are underappreciated tailwinds. We have strong household and corporate balance sheets, and there's potential for a pivot to a dovish monetary policy. These things can surprise to the upside.

Starting to see tariffs work their way through negotiations. The lack of clarity is being cleared up. Layer on top of that the accelerating effect of AI, which can both increase productivity and exert a deflationary force across industries. The long-term case for growth becomes pretty compelling. Odds of a recession are overstated. 

You have pretty unprecedented amounts in money market funds sitting on the sidelines. It's true in Canada, and in the US that amount is $7T. Those funds are collecting the yield, but if yields were to drift lower then those assets would start to flow into risk-on assets rather than risk-off assets. This is where he thinks most people are under-anticipating the opportunity that things might actually work out better than they expect.

It's an under-owned bull market. 

If things start to resolve positively, it would seem that many investors are underexposed. This market has been a lockout market, not letting people get in. Pullbacks have been very short and have prevented folks from buying the dip. This situation is probably going to continue.

In Canada, unless it's a corporate-class-structured ETF, it will distribute the income and capital gains every year.

In the US, there's a different tax structure. They wash the gains out through market-making, and you don't get the capital gains distributions. Instead, the unit value grows; upon sale, you report that capital gain. This is an advantage (not very well understood) that Canadians have in buying an American ETF. In Canada, the corporate-class ETFs tend to do the same thing.

Many times, the fees of an ETF in the US are lower. But not by much anymore, and it's not always the case.

If an estate is very large, owning US securities can subject you to some estate-law rules. But the estate has to be pretty large for that to happen.