MARKetS REPORT – Q2 2025
“A perfect summer day is when the sun is shining, the breeze is blowing, the birds are singing, and the lawnmower is broken.” - James Dent, author
Dear friends,
The second quarter of 2025 began with equity indexes plunging on the heels of the announcement on April 2nd by the Trump administration of sweeping tariffs placed on imports into the US on almost every trading partner worldwide. Volatility as measured by the VIX index soared and bond yields jumped as fixed income markets also tumbled. The quarter also delivered an array of geopolitical jolts, including a short but potentially devastating conflict between Israel and Iran. In this often-turbulent environment gold rose sharply in early April and hit a record high in mid June before closing Q2 slightly off its peak. The sudden onset of a major Middle East confrontation caused a sharp, but brief, spike in the price of oil and by quarter end it was below where it began the three-month period.
Yet despite these shocks, stock markets staged a remarkably rapid and strong recovery from the early April sell off as the quarter unfolded, with major indexes surging to record highs by the end of the period. Resilient corporate earnings supported the optimistic outlook and US investors also noted a calmer tone regarding the crucial US/China trade negotiations. And despite tariff turbulence US inflation remained steady near the Federal Reserve’s 2% target.
Bonds
US Treasury markets ended Q2 with expectations the Federal Reserve will begin trimming interest rates in the 3rd Quarter, with the two-year yield falling slightly to 3.72% by the end of the period. In the longer-run, however, analysts expect investors to demand higher returns to finance the growing US budget gap and the yield on the benchmark US 10-year note declined less, closing Q2 at 4.23%, after hitting 4.6% in late May. Yields rise as bond prices fall. Here in Canada, the FTSE Canada Universe Bond Index ended the quarter down 0.57%.
Stocks
Strong gains in Q2 put all North American equity indexes into positive territory on both a year to date and rolling 12-month basis to June 30th. For the one-year period Canada continued to lead, with gains for the S&P/TSX Composite Index remaining well ahead of those for the US S&P 500 Index, but trailing in the month of June.
For the quarter, the Canadian S&P/TSX Composite Index ended up 8.53%, the US S&P 500 Index rose 10.83%, the US Nasdaq Index soared 17.96%, the MSCI World Index was up 9.51% and the MSCI EAFE Index rose 4.80%. In the U.K., the FTSE 100 Index rose 3.17% and Germany’s DAX Index climbed 7.88%. In Asia, Japan’s Nikkei 225 jumped 13.83%.
Canada
Early in June the Bank of Canada (BoC) maintained its policy rate at 2.75% for a second consecutive meeting, citing potential inflationary pressures as a key reason for caution. BoC Governor Tiff Macklem stressed that May and June inflation data will influence future rate decisions as the Bank of Canada waits for more details on the extent of tariff impacts. Several weeks later Statistics Canada reported that inflation rose 1.7% in May (year over year), the same as April, and in line with expectations. Housing costs rose 3%, less than the 3.4% increase in April. StatsCan noted that Ontario was the leading source of rent relief nationally. Mortgage interest costs slowed for the 21st consecutive month.
The end of the consumer carbon price helped trim gasoline prices, but the cost of groceries rose 3.3% in May, annualized, half a percentage point less than the increase in April. Lower travel costs also dampened inflation in May. Inflation excluding the impact of the carbon price removal was steady at 2.3% in May. Growth stalled however as GDP slipped by -0.1% in April according to Statistics Canada, and its preliminary reading for May indicated a further -0.1 % contraction. The manufacturing sector fell 1.9% in April, the most since April 2021. Durable goods manufacturing sagged -2.2%, while non-durable goods fell -1.6%.
Across Canada the unemployment rate rose to 7.0% in May, up from 6.9% in April, and its highest level since September 2021. Manufacturing was hit hardest, with a net decline of 12,200 jobs as high tariffs on the aluminum, steel, and auto industries began to bite. Retail sales rose 0.3% (month over month) in April, but Statistics Canada’s preliminary estimate for May foresees a sharp -1.1% decline.
USA
In the US, a third and final Q1 2025 GDP estimate from the Commerce Department released at the end of June said the US economy contracted at an annual rate of -0.5% in the first quarter. In Q4, 2024 GDP expanded 2.4%. The Q1 contraction primarily reflected an increase in imports (seeking to front run tariffs), which are a subtraction in the calculation of GDP, and a decrease in government spending, according to the US Bureau of Economic Analysis.
US labour data was somewhat better than expected, with no signs of a sharp slowdown, and the unemployment rate held at 4.2% in May. However, downward revisions to the total number of new jobs added in March and April and sector-specific weakness – particularly in manufacturing – flagged underlying softness and employer caution. As for inflation data, the US Core PCE price index ticked up in June to 2.9% (year over year), up from 2.7% in May and after hitting a four-year low in April. This suggests that the expected impact of President Trump’s tariffs have not yet fed through to prices in a significant way.
US personal spending softened in May, falling by -0.3% month over month (MoM), led by a pullback in goods, particularly autos, following an earlier rush in the year to get ahead of any tariff-related car price increases. Personal income slipped by -0.4% MoM. Retail sales fell -0.9% MoM in May, the largest drop in over two years. The decline, however, was significantly influenced by the pullback in auto sales, but underlying data suggested relatively stable demand.
The US Federal Reserve held the federal funds rate steady at 4.25% to 4.50%, citing ongoing uncertainty about the economic outlook. Fed Chair Jerome Powell expressed caution and noted the Fed’s careful scrutiny of “the likely course of the economy before considering any adjustments to our policy stance.” The June reading for the University of Michigan consumer sentiment survey came in at 60.7, up from 52.2 in May. US consumer expectations for inflation in the next 12 months fell to 5% from 6.6% a month ago. However, sentiment levels remain well below immediate post-election levels and suggest consumer expectations remain tilted towards an economic slowdown and rising inflation.
And in the rest of the world…
In Europe, the European Central Bank (ECB) lowered its policy interest rate a quarter point to 2%, as expected. The ECB trimmed its growth forecasts due to US trade uncertainty but signaled that it is nearing the end of its easing cycle. Eurozone inflation fell to 1.9%, annualized, in May, below the ECB’s target of 2% for the first time in seven months and down from 2.2% in April.
In the UK, economic data suggested further softening as GDP fell -0.3% (MoM) in April but quarterly growth remained positive because of earlier strength. The employment picture continued to deteriorate, with payrolls dropping by 109,000 in May and the unemployment rate climbed to 4.6%, the highest since May-July 2021. Inflation data for May was 3.4%, annualized, above the Bank of England’s (BoE) target and the BoE kept rates at 4.25% in June.
In Japan, wages rose 2.2% in April, YoY, but fell 1.8% when factoring in inflation. The Bank of Japan (BoJ) held its policy rate steady at 0.5%, citing a cautious outlook for economic growth. Governor Ueda emphasized continued economic uncertainty and concerns over wage dynamics, reinforcing a patient approach to policy tightening.
Australia’s employment fell slightly in May, below expectations, though this followed strong growth in April. While employment growth has slowed from late 2024 levels, other labour market indicators suggest that labour market conditions remain relatively tight. Expectations that The Reserve Bank of Australia will trim its key policy rate by a quarter point at either its July or August meeting were reinforced by a drop in inflation in May to 2.1%, annualized, from 2.4% in April.
Chinese economic data indicated a mixed outlook. Consumption outperformed due to one-off subsidies, while industrial production and investment trailed expectations. Real estate continues to be a significant drag on the economy as home prices and sales continue to fall. Deflationary pressures persisted in May, with China’s broad inflation reading falling -0.1%, YoY, for the fourth consecutive month. Core CPI inched up but lower prices for consumer goods and food pulled down overall inflation in China.
Note: All index performance quoted is in Canadian dollars
What can we expect now?
The second quarter got off to a rocky start but ended with solid gains for investors who stayed the course despite often daunting headlines. During the quarter, a growing sense that “cooler heads” could perhaps temper some of the more unexpected policy twists and turns emanating from the White House helped markets look past immediate volatility. Yet a great deal of consequential trade and tariff questions remain unresolved, for Canada and the world. In Canada, tariffs have started to hit home, particularly in autos, steel, and aluminium. Growth has flatlined and the unemployment rate inched up again. Uncertainty about our trading relationship with the US continues as the two sides engage in intense negotiations with a self-imposed deadline of July 21. In the face of these challenges Canadian equities have posted solid gains year to date. The second half of 2025 may produce further surprises but, possibly, better visibility for the future direction and sources of growth in 2025 and beyond. As always, maintaining a balanced portfolio reflecting your short- and long-term goals and requirements is prudent. And it is extremely important to have guidance and stay focused on the best investment opportunities. Discipline doesn’t change in volatile markets; in fact, it becomes even more important. We are here, fully engaged, with confidence in the opportunities ahead.
Thank you for your continued trust in me and my team for the opportunity to assist you in working toward your financial goals. We are with you every step of your investment journey. Should you have any questions regarding your portfolio, please do not hesitate to contact my office. If there is a significant change in your financial life, please reach out so we can meet with you. We can be reached Monday to Friday from 9am to 5pm at our office number 519-432-6744 (extension 238 for me and extension 239 for my assistant Susan). Or after hours I can be reached on my cell phone, 519-859-6449.
Until we speak again, I hope you have a wonderful summer.
All the best,
Mark