Tying a bow on 2024: A year of convictions rewarded

On the whole, we have reason to feel confident and our portfolios have performed extremely well. We chose to remain bullish on Equities despite uncertainty on interest rates and inflation. We fundamentally believed inflation would come down and rates would soon follow—and, more importantly, we did not deviate when markets lost faith. When the consensus at the start of the year called for aggressive rate cutting, we tempered expectations, and when investors grew overly pessimistic and believed the U.S. Federal Reserve (Fed) would delay any moves until after the election, we stayed firm with our analysis.

In particular, we were bullish on U.S. and large-cap Equities even when others believed a hard landing was potentially ahead. We held this belief based on strong earnings, stable guidance and the evolution of key themes, such as artificial intelligence (A.I.). Some observers doubted that the Technology sector—and specifically the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla)—could meet the rising expectations of investors and analysts, and while those fears could prove legitimate in 2025, we were confident they could clear the high bar set for them in 2024.

We fundamentally believed inflation would come down and rates would soon follow—and we did not deviate when markets lost faith.

We also chose to manage volatility¹ risks by being overweight Gold relative to Fixed Income. This was evidently the correct call, as bullion has generally provided a better hedge against Equities and uncertainty brought on by the U.S. election. By contrast, bond markets have been subject to the whims of central banks who themselves have had to contend with the contradictions of a resilient job market and uncertain economic future. Finally, our overweight position on the U.S. dollar (USD) worked well based on two key factors: the strength of the U.S. economy and expectations that the Bank of Canada (BoC) would outpace the Fed in their rate trajectories.

Looking ahead, we think markets will remain positive but with more volatility under President-elect Trump. As such, being tactical will be very important as developments change and we see more geopolitical risk. We will be publishing our 2025 Outlook in early January and holding a special event on January 15 to discuss the market forces that will shape the coming year.

U.S. outlook

We’re gaining more certainty around a deceleration of economic growth toward 2.0% versus 3.0% for 2025—which isn’t exactly bad if we are concerned about resurgent inflation and interest rates. We are still very much within a reasonable expansionary backdrop that is merely cooling, not crashing. We continue to see very firm indicators, particularly in the labour market, where job creation and payroll additions are sturdy but edging back to a 100–150,000 pace (even accounting for the forecast-topping November figure). Households too remain resilient on balance and consumer spending robust, aided by wealth effects from rising markets and wage inflation. On the downside, lower-income households are struggling, business spending is cooling while housing remains a drag on growth. We have an expectation for a pick up in “animal spirits”² next year, as deregulation and tax-cut extensions stimulate the private sector. But there is limited upside given the already strong position the economy finds itself in.

Canada outlook

Headline growth continues to plod along. We’re not in recession, but definitively moving below trend. In some respects, that might be a positive as indebted households absorb the still-ongoing rate shock and attendant higher debt-servicing costs. We are likely past the peak, but perhaps just so—there remain more than one million mortgage holders facing higher resets in 2025. Those will bite. In terms of the labour market, we’ve experienced reasonable job creation but that has been mostly in the public sector. Businesses are struggling—corporate profits were, in fact, down in the latest quarter, which was the sixth consecutive of negative gross domestic product per capita. In addition, there is now the threat of Trump’s tariffs overhead. Our view is, an across-the-board levy of 25% perhaps happens on Day 1, but we will likely see a deal by the spring. That said, the uncertainty is real.

International outlook

The International situation is increasingly messy, with economies roiled by political crises in South Korea, France and to a lesser extent Germany—at a time when growth is being revised lower across several key countries. Europe is the next biggest target for U.S. tariffs after Mexico and China. That uncertainty is just another layer of negativity for a region that has been hit by an ongoing energy crisis and competitive disruption in auto manufacturing from Chinese electric vehicles killing European competition. Even though things could improve in 2025, we are still looking at only modest increases to our growth outlook. Elsewhere, we see resumed stagnation out of Japan following its burst of exuberance in recent quarters. A potential silver lining: we may see early tariffs deals cut with the U.S. that are not too punitive, which could help reboot risk appetite.

The party's still going for stocks, with the market continuing to view the “Trump trade” as a net positive for Equities. Technology has experienced a resurgence, as well as Consumer Discretionary (i.e., Tesla). The backdrop of economic data is still relatively benign, with job creation at a healthy run rate (putting aside the Hurricane-hit October numbers). Even if we're settling in at 100–150,000 a month of job creation, that is far from recessionary, particularly at these levels of unemployment. There are some concerns around a resurgence of inflation and the impact on the Fed’s rate path, which has been the chief source of volatility in Equity markets since the election. Our house view is that inflation is largely yesterday’s battle. Equity valuations will likely be less tied the rate environment and more to what companies can do under the new administration and its pro-growth policies.

On bonds, we are back to neutral (0) from slightly bearish last month (-1), an indication that we see more value by being on the front end of the yield curve. That said, there is more appetite for Duration³ among the group—or more conversations about it, at the very least. Rates may have tested a near-term top, with the 10-year Treasury yield hitting some resistance around 4.50%.

Overall, the bigger theme for us is an overweight to Equities. Fixed Income versus Cash is more relative value, with risk-adjusted returns⁴ a bit more favorable for bonds. But among the group there is a pretty clear consensus that we remain bullish (2) on stocks, at least through the first months of the new year. We might see some volatility through 2025—a modest pullback, call it 5–10%, but nothing in our view that completely damages our bull market thesis for the full year.

We remain bullish on U.S. market leadership through 2025 based on the strong likelihood that we see the renewal of the Trump tax cuts as well as more regulatory easing. Both developments should help see the U.S. economy grow by more than 2%, a rate above every other developed market for the third year in a row. There are a couple of tail risks (rare event chances): 1) inflation, but in order for a run up in consumer prices to materialize, we probably need a big spike in oil which is unlikely, especially given the probability of more production out of the U.S.; and, 2) policy uncertainty, i.e., what President Trump will do, which could well fuel market volatility.

On Canadian equities, all in all, we think we are not in a bad position. We are expecting trend economic growth (~2%) next year, which is stronger than other developed economies. Easing interest rates should have a positive effect on the market, which leads us to our neutral scoring. The biggest risk, in our view, is across-the-board tariffs, if enacted. That risk has already fueled some volatility. Yet we do think we'll see a deal sooner rather than later, given there are bigger trade targets.

Internationally, we are seeing some new concerns. In Europe, political risk is back. We have seen the dismissal of the finance minister in Germany, underscoring growing instability in the zone’s biggest economy, and now the French government is in turmoil. Those domestic issues are coupled with the external trade threats from the U.S. and possibly China. That country too is confronting an escalating economic war from abroad while its domestic economy remains underwhelming. Which is all to say, we’re content to remain underweight in both areas this month.

We’ve upgraded our view on Duration for the month, to slightly bullish (+1), with the bond market absorbing the potential for higher U.S. inflation and rates. With multiple Fed cuts priced out over the last couple of months, our view is that the market has potentially overshot. Expectations for a terminal rate of 3.5% or higher are probably too aggressive, with the actual rate likely residing closer to 3.0%. In Canada, the terminal rate is lower but the same view applies. We think we are going to see a couple of additional cuts (or approximately 50 basis points) compared to what the market is expecting. That should generally benefit longer bonds with the whole curve moving in lockstep.

The biggest risk to our inflation outlook is tariffs. Yet there are a couple of considerations there: 1) even in the event of aggressive across-the-board levies, there will be offsetting adjustments in currencies and supply chains that would blunt a full flow through into prices, and 2) it is goods that are subject to tariffs, and at the moment, the goods-producing sector is in outright deflation. Those are meaningful caveats working against the tariff risk.

On IG Credit and High Yield, yes, spreads are tight but with rates easing—or at least not tightening—and with an economy at or above trend, we're unlikely to see too much widening. We're happy to pick up that additional yield on investment grade. On High Yield we're neutral. From a multi-asset standpoint, for the risk we see in bonds, there is more potential upside in Equities given Fixed Income spreads are already so tight.

Even though the market is stretched in terms of valuations, the mega caps (i.e., Magnificent 7)—huge names, dominant positions—we still currently like, and it’s where investor flows are going. At the same time, we are seeing a bit more consensus (or at least an appreciation) regarding the opportunity in U.S. small caps. On a relative basis, they benefit more from tax cuts and lower interest rates compared to larger names, because their financing structures are shorter term and more geared to rate changes. They also tend to be more insulated from global trade wars because they do most of their business domestically, and have to worry less about the strong USD and reciprocal tariffs. The small-caps trade has been on and off but we see it having some momentum into Q1. We are still slightly bullish on Value (1), which is a recognition that valuations are relatively expensive, so we are finding ways to diversify that risk through option hedges or sector rotation.

On a sector basis, the group has a consensus overweight to Financials, Information Technology, Industrials and Consumer Discretionary this month. We're seeing more participation at the individual sector level, with a growing number of names trading above their 200-day moving average. Utilities has also been a popular trade; however, we are a consensus underweight at the moment despite its outperformance. A lot of momentum has been tied into the AI theme and the idea that we're going to need more electricity to power computation demand. This may prove overestimated in the near term. Utilities has historically been a more defensive sector, benefitting from falling rates by virtue of higher dividend yields, which is almost opposite to how it has traded over the last year, with a higher correlation to Growth and Technology.

We’re leaning bullish on the CAD, upgrading our score to +1. There may still be some short-term momentum in the USD, but the CAD is likely approaching its lower limit. Seventy cents seems to be a key level, both psychologically and for the market, at which point very stretched short positioning may begin to unravel. We’ve moved our Gold score back to slightly bullish (+1) in recognition that it has experienced a period of price consolidation. The question on Gold is now more one of opportunity cost. It still makes a great hedge over the long term, if something goes “boom” in the world, but in terms of fundamental drivers, the central bank buying argument isn’t as relevant in the shorter term with risk sentiment so positive.

In terms of options use, we’ve taken out a downside position in European Equities, alongside protection on Gold. We’ve also implemented some downside protection on Health Care, which has lagged the index on policy fears, which like U.S. tariffs, may be overestimated. We are hesitant to sell at these levels given the longer-term prospects, it's still expected to be the second-highest sector for earnings growth in 2025 behind Tech.