Peter HodsonA Comment -- General Comments From an ExpertA CommentaryCOMMENTSep 19, 2025

The US jobs report came out this morning and blew everyone away, very strong. That will add fodder to the arguments of the Fed hawks, though there might be some dissenters.

For the BOC, the job number today was very weak and broad-based by sector and region. Very much poured cold water on any thought of a near-term rate hike by the BOC, and there wasn't much inclination of that.

Yes, it's likely that inflation will stick around for a while and is being pushed up by energy prices. This war in the Middle East was supposed to be over in 3 days or some grandiose timeframe. The off-ramp for both sides is looking very congested. That will likely keep the oil market fairly tight, though we are hearing some reports of escorted tankers making it through the Strait. 

Nevertheless, $90 oil is a problem for the inflation because oil prices are implicit in the cost of transportation for all goods. And oil prices are explicitly part of consumer goods. It's a bigger problem in the US where the economy is running hotter in the first place and the labour market is tighter.

The big thing is what happens to wage inflation. In the States, it was not getting either worse or better. It cooled off remarkably in Canada, from 3% and a bit last month down to 2%.

The big thing is this cliche that the market climbs a wall of worry, and it's been doing that since he was last on the show in August. Both the S&P and the TSX marched up to fresh all-time highs before pulling back in the last couple of weeks, but still not too far off their highs. 

That's on the back of very strong corporate earnings growth -- close to 20% in Canada, and an unbelievable north of 50% in the US. All driven by an investment super-cycle that's centred on AI and data centres.

His firm is seeing opportunity in the suppliers of critical minerals, who are selling into the massive and global infrastructure, AI, and data centre buildout. Also seeing opportunities in stalwart secular growth champions in non-cyclical industries. Here and there are AI babies thrown out with the bathwater on which they're taking a contrarian view.

Good question. Succinct answer:  not a chance. AI is driving 2/3-3/4 of overall US economic growth. Canadian banks are a levered play on economic growth, always has been and always will be. If the AI bubble bursts, it'll be a macro headwind.

To one degree or another, Canadian banks are all operating in the States. Provisions for credit losses would likely pick up, which would impact earnings. Capital markets businesses are all making money hand over fist. If that were to fizzle and dry up, would be a headwind. Wealth management fees are predicated on value of assets managed; if markets tanked, fees would go down. Overall market multiple would compress, and banks now are trading at elevated PE ratios.

Real question:  would they weather the storm better than other parts of the market? Probably better than some, but wouldn't be immune.

Last couple of years they were positive, which was a big surprise. More often than not, we usually get negative returns in September. Now we have the midterms. If you look back all the way to 1945, the average decline during a midterm session is ~1.3%. 

Moral of the story is:  Buckle up!

His team has entry points for stocks, and they have price targets. They find that if you stick to the knitting, it'll prove out. Over the last 4-5 months the market has been in a band, albeit a wide one. It can drive you nuts, but it also provides some opportunities.

They stick to the knitting on single stocks, and then they have a hedge overlay to add some value/alpha to portfolios. If you look at the NASDAQ futures, they've traded in a range between 31,000 and 27,500. When they approach 31,000, you sell some futures. His team is always fully invested in the single stocks, and they try to add value by hedging. It works, until it doesn't :)

It was only 4 years ago when MSFT put $10B into OpenAI. Over those 4 years, it was all about agents and chatbots for software companies. But then everyone thought that the large language models were going to eat the lunch of the SaaS companies.

Over the last 12 months, this agentic AI (like an army of agents, rather than individual) has come to the front. If you can control that army to solve the puzzle or build the house or whatever, it's pretty powerful.

The Canadian AI equity story is real, but different. In the States it's all about the AI ecosystem, and sitting at the top of the hill are the hyperscalers.

In Canada, it's more of a multi-theme portfolio rather than a single AI stock or ETF. It's more about the infrastructure enablers. We don't really have hyperscalers here, but we have some fantastic enablers. Think of CLS. The poster child for industrial AI software is SHOP. We also have power and data centre beneficiaries, such as ENB, FTS, EMA, and H.

You can drill down further into space and defense AI. The first one that comes to mind is MDA.

A bit, but we have to take stock of where we are. The market, in and of itself, is not actually all that expensive. This equity market has been driven by fundamental earnings growth. 

The recent damper has been the belief that the Fed may not be hiking enough, inflation's getting a bit out of control, and long-term bond yields are moving higher. Along with all the geopolitical stuff going on.

Take a step back. Mid-teens growth in equity markets as a whole, and pretty broadly distributed. If this were December 31, we'd say it's been a pretty good year.

There's a lot of stability at the top, but a lot of volatility underneath. Some of the biggest companies are being held back, while the bottom 300-400 companies in the US and globally have seen relatively good acceleration in the last few months.

That volatility underneath is the opportunity.

Generally speaking, it's the bigger companies that are more of an opportunity than potential risk today. What we used to call the big FAANG stocks are relatively cheap for the growth profiles that they offer. 

One reason could be concerns that the AI overbuild is too much and there will be breakthroughs in the future. That type of uncertainty has caused the mega-caps and giga-caps to lag where they should be from a fundamental basis.

Growth in mega-caps has actually been accelerating, but the belief is that acceleration today means a growth cliff in the future. How much time is there for AI? How much time is there for semiconductor stocks to feed into AI?

NVDA saying they're going to grow from 50% to 70% next year makes it one of the cheapest, high-margin stocks on the market. It's trading at 11x PE because people believe that 2029 will see growth fall off a cliff.

In the context of a global, diversified portfolio, these wouldn't cross his radar at the moment. In the context of having to own a bunch of stocks in Canada, his firm owns as little a weighting in banks as it possibly can.

If you look at any of the Big 6, they trade at 25-year highs on valuation. Our economy is up and down, largely driven by stronger energy exports for the time being. Canada doesn't have the most constructive economic backdrop. Banks have been pressing the pedal on loan growth last quarter.

Basically, they're priced for perfection. Due for a 20% correction? No, because bull markets don't die of old age. Forward return expectations from here for most, if not all, the bank stocks are exceptionally low.

Be happy with the dividend, and don't expect the stock price to move all that much.

Yes, if this was a conversation about JPM. No, if we're talking about the Canadian banks. If the Canadian banks were to have massive job cuts, that'll be a problem to navigate politically. You can't have banks firing tens of thousands of people in Canada when employment's really weak. It would be really bad optics.

The sector enjoys a very cosy, highly profitable oligopoly in Canada. You don't want to risk aggressive job cuts. To do so would be penny wise, pound foolish. He acknowledges that our banks are probably not the most efficient, especially compared to those in the US.