Top six client questions

1. What is the bull case for equities?

• On a six to twelve-month horizon, we see a more positive equity outlook on the back of diminishing trade uncertainty, resilient growth, passage of the U.S. tax bill and scope for U.S. Federal Reserve (“Fed”) rate cuts. Improving trade uncertainty is key as investors remain sensitive to trade wars, but a resilient economy is also crucial for equities into 2026.
• Business and consumer surveys have weakened but are still not consistent with a recession, and purchasing manager indices are showing signs of bottoming. The labour market is likely to cool on delayed hiring rather than job cuts, and we don’t see a catalyst for mass layoffs if trade wars don’t re-escalate.
• Against this soft patch there are several economic buffers in place: a significant rise in business tax refunds, elevated profit margins near pandemic highs, and robust consumer income growth. Consensus estimates for U.S. economic growth have fallen sharply, setting a low bar for incoming data to positively surprise investors. 2025 growth estimates have fallen to just 1.4% while 12-month forward earnings per share (EPS) forecasts have fallen from double digits to the mid single digits.
• Earnings will increasingly incorporate 2026 GDP outlook, which consensus has also downgraded. We expect the economic outlook for 2026 to improve given lower trade uncertainty and net tax stimulus from the One Big Beautiful Bill Act (OBBBA).
• Individual tax changes and business tax incentives included in the tax bill amount to a net positive 0.5-0.8% fiscal impact over 2026-2027. The drag on growth from tariffs more than offsets the boost to growth from the fiscal package, but the latter is still not reflected in consensus forecasts.
• We remain cautious on U.S. equity valuations, but eventual Fed rate cuts that leave the Fed funds rate closer to 3% rather than 4% would offer additional cushion. Canadian, EAFE and Emerging Markets equities continue to offer diversification from higher U.S. valuations and ongoing policy uncertainty.

Figure 1: U.S. Growth and EPS expectations have repriced swiftly lower

Source: Bloomberg, BMO GAM. As of 11 June 2025.

2. Has gold run its course?

• We find gold’s past bull run both encouraging and cautionary. On the latter, downside risks are either lower trade tensions or peace in Ukraine and the Middle East. Beyond those risks, the macro-outlook is more important and likely to keep gold’s tailwinds in place.
• One of the best backdrops for gold is sticky inflation, higher for longer rates and U.S. dollar weakness, which we expect if tariffs remain in place and the economy muddles through.
• This keeps us cautious on bond duration which can continue to underperform gold. Investors cannot rule out more extreme scenarios such as stagflation or recession, and we expect gold to be a better hedge than bonds given concerns of the U.S. deficits and Treasury supply as well as positive bond-equity correlations.
• Gold is now the second largest global reserve asset, surpassing the euro in 2024. We expect central bank demand to continue because of U.S. dollar diversification needs and a new world of tariffs and geopolitical risks where the U.S. dollar might continue to be weaponized.
• We continue to like gold as a diversifier and inflation and geopolitical hedge, funded by fixed income, and discuss further in a recent piece (see What Drives Gold, and Why Should Investors Own It?).

Figure 2: Gold to benefit from further U.S. Dollar depreciation

Source: Bloomberg, BMO GAM. As of 11 June 2025.

3. How much trade war de-escalation should we expect this year?

• Compared to the start of the year when the trade agenda became increasingly negative, trade policy has turned more positive, with USMCA carveouts, bilateral trade deals and improving U.S.-China relations.
• We remain focused on the end game of the trade war: broad trade barriers, but not high enough to cause a global recession. We are moving closer to that end game, with most of the increase in trade barriers behind us.
• As of June, the U.S. effective tariff has increased by roughly 12 percentage points, while additional sectoral tariffs, pending trade investigations, could increase that average by a few percentage points.
• China trade negotiations will be bumpy, but there too progress has been made. Because Trump ultimately wants deals and is attentive to financial market volatility, it is reasonable to expect more de-escalation of trade tensions.
• Greater trade optimism helps cyclicals and U.S. equities to recover though what remains is an economic landscape of higher costs and lower competitiveness.

Figure 3: Trade optimism to further the recovery in cyclicals

Source: Bloomberg, BMO GAM. As of 11 June 2025.

4. How dangerous is U.S. fiscal policy for interest rates and the U.S. dollar?

• U.S. debt as a share of GDP is on a rising trajectory toward 120% in 2035 amid higher for longer interest rates and limited appetite in Congress to meaningfully reduce deficits. Markets are increasingly sensitive to debt dynamics.
• Debate centers around a potential tipping point where the U.S. economy can no longer service its debt burden. Investors would demand higher yields, which in turn raises debt levels and a viscous cycle ensues of higher bond yields and a lower U.S. dollar. It remains highly uncertain if or when that point would occur, but estimates from the Penn Wharton Budget Model and IMF point to levels of 160-175% debt-to-GDP at a minimum, which is unlikely to be reached in several decades.
• As a critical backstop, we would expect the Fed to return to Quantitative Easing and monetize government debt as it did in the aftermath of the Great Financial Crisis of 2008.
• Changes in expectations, rather than the fiscal trajectory alone, are also important. In the year ahead, we do not expect significant changes to deficit projections, as consensus already projects the deficit to represent 6.5% of GPP in 2026. The OBBBA does not add to deficits over a 10-year horizon compared to the current policy baseline, nor does it increase deficits within the next few years if tariff revenue is included.
• On the other hand, the tax package keeps the economy on a path of 6% or more budget deficits. A negative growth shock worsens deficits as fiscal policy acts as an economic stabilizer, pushing the economy closer to a tipping point as concerns mount over nominal growth falling behind rising interest costs.
• For fixed income assets, we expect positive term premia, or compensation to hold longer-term government debt, to persist in U.S. treasuries.
• Gold remains the best hedge to higher U.S. yields, a lower U.S. dollar and potential tipping points.

Figure 4: U.S. debt on a rising trajectory but remains well below tipping points

Source: Haver, IMF, Penn-Wharton, 2025.

5. Is Canada already in recession?

• Canada is most exposed to a U.S. trade war: the economy is highly open to trade, and trade is highly dependent on the U.S. with about 75% of exports heading to the U.S.
• We think a manufacturing recession is underway with ongoing layoffs, production cutbacks and delayed investment plans in automotive, steel and aluminum industries. Spillover effects are likely in the broader transportation and wholesale and retail trade industries.
• Fortunately, tariffs remain lower outside of motor vehicles and metals, oil activity is relatively unscathed due to U.S. dependence, and services are a much larger share of the economy. Still, job growth has weakened, unemployment is slowly rising and the housing market is stalling. We expect the Bank of Canada to cut interest rates in 2025, cushioning rate-sensitive sectors. Additional policy offsets will come from fiscal policy, with Carney’s Liberal platform aiming to add 0.5% of GDP of stimulus this year and 0.8% in 2026.
• A full-blown Canadian recession likely requires a more significant U.S. slowdown. If Canada does skirt a recession, challenges will remain, most notably related to business investment and productivity, and pending the U.S. tax bill, the U.S. may still be a better place to invest.
• With barely one 25 basis point rate cut expected by markets, Canadian duration could perform well into year end, especially if the Fed returns to rate cuts.

Figure 5: Weak Canadian job growth to continue slowing

Source: Haver, BMO GAM, 2025.
(“LFS” = Labour Force Survey; “SEPH” = Survey of Employment, Payrolls and Hours)

6. Are oil prices near a bottom?

• We think the bottom is in, if a U.S. recession is canceled. Most of the past drop in prices to below $60/bbl was supply driven, as OPEC accelerated the pace of its production increases this year with the goal of reclaiming market share.
• Demand on the other hand has been stable despite the trade war. The oil market is likely to remain in surplus, with at least one more OPEC supply increase this summer and ongoing soft global demand.
• Trade optimism could push up prices further, but a more prominent upside risk is Middle East tensions. Disruptions to Iranian supply could push up oil prices to $90-100/bbl. But this could be a temporary spike, which would be less damaging to the global economic outlook.
• Year-to-date, energy stocks have underperformed and are an attractive hedge not only to geopolitical risks but broader reflation if the economy recovers more rapidly or a commodity price shock materializes.

Figure 6: Energy stocks an attractive hedge to reflation risk

Source: Bloomberg, BMO GAM. As of 11 June 2025.