Markets Continue to Climb as Interest Rates are Expected to Come Down

September 2025 Insights & Strategies

Macro Highlights for August

• U.S. 2Q25 GDP was revised up to +3.3% (from +3.0%) annualized growth over 1Q25, a sharp rebound from the -0.5% contraction in 1Q25. Net exports’ contribution to GDP growth swung from a -4.6% drag in Q1 (as companies stocked up on inventory to front-run tariffs) to a +5.0% boost in Q2. Consumer spending continues to support growth, at +1.6% in Q2, after a +0.5% gain in Q1.
• Canadian GDP weakened significantly to -1.6% in 2Q25 (annualized), broadly in line with the BoC forecast of -1.5% in the July MPR. Net exports were a -8.1% drag to GDP, with exports down 26.8%, reflecting the sharp adjustment in U.S.-bound shipments following Q1’s pre-tariff inventory surge.
• The labour market remains of particular interest/concern, as we see uncertainty leading to both low hiring and low firing in the U.S., where the unemployment rate inched up slightly but remains relatively low at 4.3% (up from 4.2% in July) with only 22k jobs created in August (3-mth avg 29k/mth). The Canadian unemployment rate rose to 7.1% in August (from 6.9% in June and July), with jobs declining by 66k in August, after a 41k drop in July, as the labour force also contracted by 0.1% in the month. We see concerns about further weakening in employment data as a key driver behind central bank rate cut expectations.

Financial Markets in August

• The TSX delivered a 4.8% price return and a 5.0% total return (incl. dividends) in August, boosting the year-to-date returns to 15.5% and 17.6%, respectively. Meanwhile, the S&P 500 posted a 1.9% price return and 2.0% total return during the month, with year-to-date returns of 9.8% and 10.8%, respectively, all in local currency.
• U.S. equity markets continued to climb in August as 2Q25 earnings season wrapped up with ~80% of S&P 500 companies beating expectations, with y/y earnings growth of ~12%. The Mag 7 and Tech have remained key drivers in YTD performance, as A.I. enthusiasm and capex spending continues, although we saw some rotation in August as Materials, Health Care, and Energy were top performers.
• In Canada, we are increasing our year-end target on the TSX Composite index to 29,900 from 28,600, as we just completed a positive 2Q25 earnings season and forecasts are rising for 2026. We are also gaining more confidence in a positive outcome from Canada-U.S. trade and security talks and as the USMCA continues to shield the majority of Canada’s exports to the U.S. from the effect of tariffs, despite continued pain in certain sectors. We do expect more volatility in 2H25 however, as there remains pressure from trade tensions and headline risks as we advance towards a more stable 2026.

Upcoming

• Tariff frameworks are becoming clearer for more countries, but we are still waiting for details on any trade and security deal between Canada and the U.S. Multiple deadlines have past, and even once we see whatever framework is established in this round of discussions, focus will quickly shift to the USMCA renegotiation in 2026, since that agreement has effectively shielded many Canadian products and industries from the broader tariff threats and announcements. A new Court of Appeals ruling has supported the U.S. Court of International Trade’s ruling that the President did not have the authority under IEEPA to implement the broad tariffs that have dominated headlines for seven months. While Trump has multiple avenues to achieve similar ends, the Supreme Court will ultimately decide the path of these tariffs. President Trump has asked for an expedited ruling, but that would still likely only be revealed in early 2026. A significantly disruptive aspect could be the reimbursement of over US$62 billion in IEEPA-related tariffs collected so far.
• The BoC forecast is for Canadian GDP of +1.0% in 2H25 as the volatility from tariff front-running normalizes and businesses adjust to new tariff levels and supply chain adjustments, although any major revision to the USMCA, which currently protects 80-95% of Canadian exports to the U.S. from tariffs, could require a revision to that forecast.
• Both the U.S. Fed and BoC are expected to announce any updates to policy interest rates on September 17. We expect to see 25 bps cuts on both sides of the border, with further easing into the end of 2025, plus more cuts from the Fed in 2026.