THIS WEEK WITH SADIQ
Inflation and tariffs: A crushing combo?
February 17 to 21, 2025
Market Update
- Equity markets pushed higher this week, and continue to largely shut out the tariff noise.
- The S&P 500 rose 1.5%, led by Technology and Communication Services, while Health Care lagged.
- The TSX inched up by 0.2%, as a rally in telecom was offset by weakness in Health Care, Energy and Consumer stocks.
Monthly perspectives
Equities
Fixed Income
Cash
Asset Mix
- We downgraded equities to a modest overweight as we expect more speed bumps from the ongoing global trade war.
- We remain confident the U.S. economy will remain robust and support corporate earnings and investor sentiment despite concerns from tariffs, which we think should have a more moderate impact on the U.S. growth and inflation outlook given our more benign base-case on tariffs.
- A robust U.S. economy also means the U.S. Federal Reserve will slow its interest rate cuts in 2025.
- We remain neutral fixed income and continue to prefer funding our equity overweight with cash.
Canada
U.S.A.
EAFE
EM
Equity
- While we still prefer U.S. equities given our bullish view on the U.S. economy and outlook for corporate earnings, we downgraded them.
- We remain underweight to international equities as we expect tariffs to impact Europe more negatively than other regions.
- We upgraded emerging markets (EM) equities to neutral as we think trade tensions with China will not be as disruptive this time around, which would be a better than- expected outcome for EM sentiment.
- We remain neutral on Canadian equities; we still think Canada is better positioned to handle Trump’s policy agenda while the more aggressive Bank of Canada rate cuts will help cushion the Canadian economy in 2025.
IG Credit
High Yield
Duration (U.S.)
Duration (Canada)
Fixed Income
- Our asset mix within fixed income remains unchanged this month.
- We remain slightly overweight to Canadian bond duration as the sluggish pace of trade uncertainty should create additional headwinds for the Canadian economy, which should lead the Bank of Canada to continue lowering its interest rates in 2025.
- We remain neutral investment grade and high-yield fixed income, we prefer to take equity risk given the tight credit spreads.
- We remain slightly overweight to gold as we expect tariff and inflation fear to persist while we believe investors’ appetite for gold remains in a secular bull market.
Value
Size
Quality
Momentum
Style/Factor
- Our asset mix across style and factors remains unchanged this month.
- We continue to expect some factor rotation after Trump’s election and expect small caps stocks to benefit from the robust U.S. outlook and Trump policies.
- We continue to expect quality companies to do well and offer a better cushion in case the U.S./global economy cooled unexpectedly and in case tariffs scare unexpectedly escalated and torpedoed investor sentiment.
Canadian Dollar
Gold
Implementation
- The long-term bull case for gold remains largely intact as a portfolio diversifier while EM central-bank appetite for gold continues and global trade wars are starting at the same time when inflation fear remains sticky.
- We remain neutral on the loonie this month, acknowledging that while Trump tariffs could hurt the loonie, we think a lot of bad news is reflected in the value of the Canadian Dollar.
- Once the dynamics of tariffs peaks and diminishes, it could be a good window to start hedging U.S. Dollar exposures, something to watch for during the first half of 2025.
Disclaimers
The viewpoints expressed by the author represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular Investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
This article may contain links to other sites that BMO Global Asset Management does not own or operate. Any content from or links to a third-party website are not reviewed or endorsed by us. You use any external websites or third-party content at your own risk. Accordingly, we disclaim any responsibility for them.
Commissions, management fees and expenses (if applicable) may be associated with investments in mutual funds and exchange traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. Please read the fund facts, ETF Facts or prospectus of the relevant mutual fund or ETF before investing. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated. For a summary of the risks of an investment in BMO Mutual Funds or BMO ETFs, please see the specific risks set out in the prospectus of the relevant mutual fund or ETF. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination. BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal.
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
Weekly Commentary
Inflation
Last week’s U.S. Consumer Price Index (CPI) report showed that inflation unexpectedly rose in January, with prices up 3% from a year earlier—the highest rate in six months.1 No one is surprised to see stickier inflation. The economy remains in good shape, and one consequence of that strength is that prices may stay higher and certain areas of the economy may run hot, as we’ve seen with food and energy. The market took the news in stride, but it has impacted interest rate expectations: the U.S. Federal Reserve (Fed) is now expected to only cut rates one more time in the near term, with further easing being pushed out to the end of the year or later. This isn’t necessarily a bad thing, in our view. If we don’t get any more rate cuts (which isn’t our base case just yet), then that’s a slight disappointment, but not a big one. If unexpected rate cuts do occur, however, that would be a very bullish surprise for markets. The fact that overall expectations are being tempered is probably a good thing. The tariff situation could exacerbate inflation, but how much is up for debate. So far, Trump’s new tariffs—10% on China, 25% on steel and aluminum, and some new retaliatory measures—aren’t too bad compared to earlier expectations. But we’re still in the early innings, and it remains unclear what Trump’s endgame is. By the end of February, we should have a better sense of whether Trump is satisfied with Canada and Mexico’s response so far, or if this is just the first stage of negotiation.
Bottom Line: We expect inflation to remain relatively sticky, but as long as it doesn’t spike, the U.S. economy should stay fairly strong.
Tariffs
Speaking of trade policy, it’s become clear that Trump’s approach is to threaten tariffs as a means of gaining concessions from other countries—a way of saying, “if you don’t give me something, I’ll make you pay.” He will target any country that tries to play hardball, but if they do what he wants, he may partially back down. Essentially, he’s being a bully. In terms of tariffs already announced, the 25% tariff on steel and aluminium is likely to have an outsized impact on Ontario and Quebec, which are major steel producers. Overall, the steel and aluminium industries make up 1.1% of Canadian gross domestic product (GDP).2 But the U.S. won’t emerge unscathed: Canada exports roughly $35 billion CAD of the two metals across the border. If Trump is determined to make American manufacturing more competitive, this is one tariff that could stick in some shape or form. The delay on the original 25% tariffs on Mexico and Canada is positive for markets for the moment. But in the medium term, it does create uncertainty and could make businesses hesitant to invest in Canada.
Bottom Line: In general, we believe Trump is using tariffs as a negotiating tactic, but the new steel and aluminium tariffs could have a meaningful impact on the Canadian economy.
Earnings
As Q4 announcements continue to roll out, the theme of this earnings season has become clear: earnings do matter. Since last week, we’ve seen more earnings beats, and overall results have been relatively good. Companies that have exceeded expectations have gotten rewarded by markets, while companies that fell short have been punished. Financials have had good earnings, are the second best performing sector in 2025, and were one of the key sectors we highlighted in our 2025 Outlook. We still feel there is more room to run for the sector. Technology has also shown good results. We have seen some cautious forward guidance, which is worth monitoring on a quarter-by-quarter basis to see if there is a noticeable slowdown in expectations. But overall, we expect earnings to continue to be strong, which is why we’re remaining overweight equities, though we did take some profits at the end of the January. Looking ahead, Nvidia is still the company to watch. We’re considering adding some protection on our exposure to the chip sector in advance of their announcement on February 26, as it is really uncertain if the company will meet investors’ high expectations given the earlier news on DeepSeek.
Bottom Line: With the Nvidia announcement on the horizon, earnings continue to be strong, though we will continue to monitor guidance for signs of a slowdown.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Opportunity in crisis: an active manager’s dream come true.
1 Natalie Sherman and Charlotte Edwards, “US inflation unexpectedly increases,” BBC, February 13, 2025.
2 Statistics Canada, as of February 13, 2025.