A Comment -- General Comments From an Expert (A Commentary)

Central banks cutting interest rates could lead to deflation - perhaps rates are falling too fast. Would suggest Canada mirrors USA who hasn't cut rates yet. Inflation is not going away. Recent tariff threats from USA are reality check to Canadians. Trump administration has done more for Canada in the past two weeks than years of Canadian Federal leadership. Canadian energy will hopefully start to renewed development as Canadians recognize value of energy resources. 

Tech Themes That Created Investing Opportunities:

Smartphones

You probably have realized by now how hard life would be if you didn’t have a smartphone. Boarding a plane? Reading a menu? Ordering a taxi or Uber? Looking for directions? Reading the newspaper? Signing forms? Good luck with that. Essentially, smartphones combined the power of processors and the internet and turned your phone into your own personal assistant, mobile encyclopedia and best friend. The smart phone set off entire industries of companies serving the sector, from app developers to all those kiosks in the mall selling phone covers. You know the company we are going to mention here, of course: Apple Inc. After the recession in 2002, Apple shares went on a 12-year tear, only declining once (46 per cent in 2008) and the company saw its stock rise from 25 cents (split adjusted) to $28 in 2014. It has, of course, increased nearly 10-fold from that level as well to today’s price.

Google

Yes, we are going to single out a specific company here as a tech development. Tied of course to the internet, Google (now a division of holding company Alphabet Inc.) simply made the internet more usable for the world. I remember being frustrated by internet searches back in the day, and a co-worker urged me to use Google. I had never heard of it before, but suddenly the internet was there in all its glory, ready to be discovered. Google searches became so useful and pervasive that the company itself became a verb: “Just Google it,” your friends would say. Since its early days, of course, Google (I don’t think I will ever call it Alphabet) has transformed into a corporate behemoth. It has used its massive cash flow (US$105 billion annually now) to develop new products and services and/or buy all sorts of companies and products and services. It is now about a US$2.4 trillion company. It’s hard to believe that Alphabet has only been public for less than 21 years. Shares have gone from US$4.80 to about US$195 since their debut in 2004.

Artificial Intelligence

AI went mainstream in 2022 with the launch of ChatGPT. Suddenly, AI assistants could churn out entire reports on topics, write essays for students, set up vacation plans, write software code and create videos and graphics. AI usage has started to creep into everyday life, from call centres to drive-through restaurants, internet searches and data analysis. We are not quite at the home-robot stage, but we are certainly getting closer. The dawn of AI is probably a bigger technological advancement than the internet. Of course, it can’t happen without the internet, where AI gets all of its data. Again, you know the poster child of this development. Nvidia Corp., which produces the GPU chips that run AI programs, has seen its shares go from less than US10 cents in 1999, to hitting about US$129 this week. Will DeepSeek change its direction? Only time will tell, but it certainly took a big hit when the DeepSeek news came out.
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When you look at the S&P 500, it has estimated earnings growth of 11% for this year, and ~12% for next year. Looking at mid-caps, it's 11% this year but 16% next year. He likes mid-caps, given their (rare) discount to large caps and their higher growth prospects.

He does think about it, and we can certainly expect more chaos coming out of different US policies. Yet, historically, we know that these types of events are short-lived. 

Tariffs on China are a bigger deal, because it's 19% of global GDP, compared to Canada and Mexico which are less than 4%. In 2018 when Trump first placed tariffs on China, the market dropped about 19.7%. But within less than 3 months, it rebounded. So these risks are opportunities, not obstacles.

Last 10 cycles have seen an 18.1% average return in the first year post-election, with a 90% win ratio. So, 9/10 times in the last 10 cycles, the market was higher in the year right after a US election.

There's also the January barometer: how goes January, so goes the rest of the year. Since 1950, a positive January has led to the S&P being up 12.2% on average, with an 87% win ratio. January 2025 was great, with the Dow being up ~5% and the S&P up ~3% (as of a few minutes ago).

He's always looking for earnings growth from companies, at least double digits or higher. He also likes industries in which there are few competitors.

Usually, he's 70% invested in the US (with some of that being international exposure), and 30% Canada. Right now, he's 73% US (and a smidgen of global) and 27% Canada. A lot of that is due to stock-picking and to US equities performing just a bit better than Canadian.

At this point, he doesn't think he'll be pushing his US exposure higher, as it's already above the normal weight that most Canadians would have in portfolios. Though it could fluctuate by 3-4%. At the end of the day, the US is a much bigger sandbox to play in, with more choice than in Canada in terms of scale and scope.

There will be years when Canada will perform very well, given its weighting in financials and resources, but right now he likes the US quite a bit.

Doesn't own any names in the space at the moment. Yields will have to start coming down pretty dramatically for dividend players, such as the telcos, to start getting a good lift. And he's not seeing that yet. Longer term, he'd argue that a lot of these names don't have the growth he's looking for.

These names will do well under the new administration and with de-regulation and pro-business policies. Environment ripe for increased M&A activity and increased investment-banking fees.

That brings up issues of Canadian patriotism. He has to look at things from the stance of what he needs to do for clients to grow their portfolios in a risk-managed way. The US will always have the biggest sandbox; from WMT to SBUX to AMZN, it has names that we just don't have in Canada.

Lots of people are saying to buy Canadian products. That's fine, but they're in WMT and COST buying Canadian products. In his opinion, not sure how in this global world you can accomplish buy-Canadian in a major way that makes a difference.

He follows everything, always looking for opportunities. Now, the problem he has with resource stocks is they dig a hole in the ground, bring something to the surface years later, and then have to sell it for more than they paid. Cost-effective recovery rates are getting harder. It's a classic, cyclical, commodity-type industry; doesn't lend itself to the type of quality companies he focuses on at his firm. That being said, he likes today's capital discipline, and there are some opportunities in that sector in Canada and elsewhere.

He looks for quality companies with a long-established track record of profitability, free cashflow, and dividends. All of which tends to lend itself to larger caps, though today there are some opportunities in small- and mid-caps.

In the short term, company operations matter. In the long term, capital allocation matters a whole lot more.

He had a bit of fun with ChatGPT doing a 25-year regression analysis of America's GDP growth and the S&P 500. The correlation ended up being less than 0.1, utterly meaningless. The stock market's a leading indicator and more likely to tell you what's going to happen to the economy, than the other way around.

In 2022, the fear that dominated investors' minds was that interest rates were going to stay higher for longer. Well, they have, yet markets have progressed substantially. So don't get too hung up on trying to predict the economy if you want to work out what's going to happen with the stock market.

Corporate profits are inextricably linked to nominal GDP over the long term. In 2000, we had the best US economic growth outside of the pandemic recovery, but the stock market fell 10%. In 2009, coming out of the global financial crisis, the US economy contracted by 2.5%, and the stock market was up almost by a quarter.

Where can investors hide from tariffs:

Not all companies would be affected by tariffs, and there are some niches in the market that are not affected that much because of this political noise. Those players are companies that focus on the domestic market and have less exposure to the U.S. as their key operating segment or suppliers; those companies could still do just fine in this environment including:

Financial names: X, IFC, BN, FFH

Gold exposure: FMV, WPM

Utilities: CPX, FTS, H

Technology: CSU, VHI
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