April was a tense month, beginning with the Liberation Day announcement by the US President on April 2. The proposed tariffs were broader, deeper higher than most analysts’ expectated.

The Treasury Bond market reacted strongly (a recap stated it “went into convulsions”). The 10-Year Treasury Bond yield rose 64 basis points in two days, a major move for a market where high single-digit moves in a day are more common. Rising bond yields mean falling bond prices. Treasurys lost more than 5% in value in one week.

It was the most volatility experienced in the fixed income markets since the pandemic shock in March 2020.
As a result, tariff proposals were quickly put on hold on April 9th by the US Administration. Over the ensuing weeks a seeming détente settled over the market as the rhetoric cooled somewhat (with the occasional notable hiccup) and investors grasped the impact of a world with tariffs in place.

Global stock markets began the second quarter of 2025 with a sharp sell-off. The losses were triggered by the tariff-related shock that resulted from Donald Trump’s Liberation Day announcement. This announcement was made on April 2 when most global stocks markets were closed. President Trump’s announcement included a series of tariffs that were materially higher than most analyst estimates. This led to a significant spike in market volatility the following day as the S&P 500 fell by nearly 5% while the Nasdaq plunged by close to 6%. International markets were also hit by the tariff announcements with the Euro Stoxx 600 index falling 2.6% and the Nikkei 225 falling nearly 3% in the trading session that followed Liberation Day. Stock market losses accelerated the following week with global indices plunging on Monday April 7th. The Euro Stoxx 600 index fell 4.5% while the Nikkei 225 fell nearly 8%. The heightened volatility was driven by several concerns including the potential for trade wars, rising geopolitical tensions, and tighter financial conditions triggered by rising bond yields. However, the global stock market rout was very short lived because on April 9th, President Trump announced 90-day pause on most tariffs. This pivot by President Trump set the stage for a huge rally in global equity markets in the months that followed. This allowed most of the major developed world stock markets to finish the second quarter in positive territory.

From its high on February 19, 2025, the S&P500 bottomed April 8th down -18.9% (Exhibit 1). Technically we avoided a bear market during the second quarter 2025, defined as greater than a -20% drop, as the S&P500 recovered from Trump’s April 2nd Liberation Day surprise with the announced 90 day pause on reciprocal tariffs announced on April 9th. With that reprieve, the S&P500 fully recovered to its previous high by the end of the second quarter. Meanwhile, the TSX hit new highs during this quarter. The S&P500 total return was +10.94% in U.S. dollars. Adjusting for currency, the S&P500 returned +5.15% in Canadian dollars, as the Canadian dollar increased US +3.99 cents over the same time frame to US $0.7349 . The TSX total return was +8.53% in the second quarter.

European equities have spent the past decade (2014-2024) in the shadow of U.S. and other developed world stock markets. In fact, European stocks lagged most of the large, developed world equity markets by a very wide margin as seen in the table below.

Source: Bloomberg (12/30/2014 – 12/30/2024)

As measured by the broad Stoxx Europe 600 index, European stocks generated less than half of the return of the S&P 500 (a leading U.S. index) from 2014-2024. European equities also lagged Japan, Australia, and Canada, by a significant amount as seen in the table above.

Some of the key factors that have caused Europe’s stock markets to underperform include sluggish economic growth, a lack of innovation, a weak banking sector, and Germany’s debt brake. All of these factors collectively acted as headwinds for Europe’s economy. However, many of these headwinds are now turning into tailwinds, which makes us more enthusiastic about the outlook for European equities in the years ahead.

Before we discuss the positive changes, it is worth revisiting some of the headwinds that led to Europe’s underperformance. The Great Financial Crisis (GFC) in 2008-09 is a good place to begin. While regulators in the United States moved quickly to stabilize their banking sector in the aftermath of the GFC, Europe’s path to recovery was very drawn out and filled with turbulence. In the years following the GFC, Europe went from crisis to crisis with several countries and banks flirting with the prospect of a default. Political upheaval including the Grexit and the Brexit, and other similar events also put stress on the system. To make matters worse, this upheaval was compounded by weak economic growth. This was happening at a time when the European Central Bank held interest rates in negative territory for nearly seven years. This put stress on the banking system by depriving them of their ability to generate sufficient net interest income. This in turn, had a negative impact on their willingness to lend. Taking all of this together, we can call it a negative feedback loop that helps to explain why Europe underperformed other parts of the developed world for the last decade.

But at the beginning of 2025, things started to change. Europe went from a laggard to a leader in terms stock market performance among the large, developed world economies. This can be seen in the table below.

Source: Bloomberg (12/30/2024 – 03/31/2025)

While there are many questions about the sustainability of Europe’s performance in the first quarter of 2025, we believe there are positive catalysts on the horizon. Looking forward, the region is set to benefit from lower interest rates, fiscal stimulus, and various initiatives related to investments and competitiveness. Furthermore, Europe’s banking system has returned to a healthy position. This is best exemplified by the fact that European banks have been one of the best performing sub-sectors in Europe over the last 2 years. In fact, from 2022-2024 the European Banks sector outperformed all of the large, developed market indices referenced in this piece. This can be seen in the Appendix.

In terms of monetary policy, the European Central Bank (ECB) cut interest rates by 25 basis points to 2.25% in April. This was the seventh interest rate cut in the current cycle and there are further rate cuts expected. Cutting interest rates should provide a tailwind to economic growth, which would potentially boost stock market returns. Europe’s interest rate cutting cycle stands in contrast to the United States where the interest rate cutting cycle has been on pause since January of this year. Inflation has been more persistent in the United States, so the U.S. Federal Reserve Bank has been reluctant to cut interest rates beyond the initial cuts that began last September.

When it comes to fiscal policy, a significant announcement was made in Germany a few months ago. On March 18, 2025, Germany’s Federal Parliament voted in favour of a landmark bill that plans to unlock hundreds of billions of euros for defence and infrastructure projects. The passing of this bill marks one of the largest fiscal policy shifts in postwar Germany given its decision to relax the debt brake. The debt brake was a constitutional fiscal rule put in place in the aftermath of the Great Financial Crisis (GFC). The debt brake limited government borrowing to 0.35% of GDP, which has acted as a headwind towards capital expenditures since the GFC in 2008-09. As a result of the debt brake, Germany has debt levels far below other countries around the world. Germany’s debt-to-GDP ratio is 62%, which compares with the United States at 124%. Given its low debt level, Germany has considerable room to manoeuvre with fiscal policy. From our perspective, Germany’s new-found commitment to fiscal stimulus should mark the beginning of a renewed cycle of capital and infrastructure investment. This is significant given that Germany is the largest country in the Eurozone. We believe that its spending in the years ahead should have positive flow through impacts to other countries throughout Europe.

In addition to monetary stimulus and Germany’s fiscal stimulus bill, several initiatives have been announced in recent years to boost Europe’s economy. The European Commission recently launched a new Competitiveness Compass, an initiative to improve economic growth in the Eurozone focusing on innovation, decarbonisation, and security. In addition, there is also the Next Generation EU program, which is considered one of the largest economic stimulus packages ever financed in Europe. The size of Next Generation EU is approximately €800 billion, which will be invested across many different areas including digital transformation, healthcare, and the green transition. In addition to the Competitive Compass and the Next Generation EU, there is also the European Chips Act. This Act was designed to increase the region’s position in the globally important semiconductor industry.

On top of all the catalysts outlined above, European stocks also trade at a significant discount relative to the United States based on historical levels as seen in the chart below.

The valuation discrepancy illustrated in the chart above utilizes the price-to-earnings (P/E) ratio. From 2000 to 2016, Europe traded a 2 P/E multiple point discount to the United States. But starting in 2020, the European discount widened significantly and reached a high of 9 P/E multiple points in 2024. Given the rally in Q1 2025 for European stocks, the discount has recently narrowed to about 6 P/E multiple points. However, the discount remains well above the historical average.

In summary, we believe that the outlook for European equities is more promising than it has been in a long time. From our perspective, Europe sits at the centre of a global realignment that has been unfolding over the last few years. This realignment was recently reinforced when the U.S. announced it would withdraw some of its overseas spending on global security. This shift has prompted a significant increase in European government spending, particularly on defence. Looking forward, we believe there are significant catalysts that will provide tailwinds for European stocks in the years ahead. These tailwinds include monetary and fiscal policy, as well as various initiatives that will foster economic growth throughout Europe. We have been positioning our Global and International portfolios to take advantage of the opportunities that lie ahead for Europe.

Appendix

Source: Bloomberg (12/30/2022 – 12/30/2024)

In 2010, as investors were still reeling from the Great Financial Crisis, we offered a simple piece of advice: Don’t be a bull or a bear. Just be right. It was a reminder that successful investing isn’t about ideology—it’s about weighing the evidence and making decisions grounded in reality, not emotion.

Today, that philosophy matters just as much. After two years of double-digit gains, US equities were down close to -20% earlier this year, and are still underwater on a year-to-date basis.

Source: Bloomberg

Now, many are wondering: Does the volatility of 2025 represent a temporary correction as we navigate the U.S. trade standoff before resuming more-or-less normal economic activity, or are we on the verge of a more extended downturn?

Before we go further, let’s stop to consider what a bear market could actually look like. Research from Goldman Sachs suggests that there are three types of bear markets going back to the 1800s, defined by their causes as well as their average declines, lengths, and times to recover.

• Structural bear markets are the most severe. They are triggered by structural imbalances and asset bubbles. They average declines of -60% over three years or more and can take up to a decade to fully recover. Good examples are the 2000 Tech wreck and, more recently, the 2008 Global Financial Crisis. ​
• Cyclical bear markets are the most typical. They are a function of the economic cycle, triggered usually by inflation, rising interest rates, and falling profits. They average declines of about -31%, last about two years, and take around four years to fully rebound. A version of this occurred in 2022, although with corporate debt in check and US consumers largely locked-in at low mortgage rates, we avoided a recession.
• Event-driven bear markets are triggered by one-off events. They do not lead to a domestic recession. They are associated with average declines of about -27%, last only about eight months, and recover within a year. Examples could include a war, an oil produce shock, and the Covid pandemic. Leading up to Covid, the economy was in good shape, with low inflation and stable growth—very similar to today.

We’ll return to these bear market scenarios in our final analysis. For now, let’s review some of the strongest arguments for the bull and bear cases going forward.

The Bear Case

Let’s start with what could go wrong.

Consumer sentiment has plunged. In March, the University of Michigan Consumer Sentiment Index fell to its lowest level since November 2022, and well below consensus expectations. This marks the third straight month of decline, with many consumers citing high uncertainty about government policy, personal finances, inflation, and market conditions. Sentiment today sits at or below levels historically associated with recessions.

Source: Yardeni Research

Inflation expectations are also on the rise. In March, year-ahead consumer inflation expectations spiked to 4.9%, up sharply from 4.3% in February. Five-year inflation expectations rose to 3.9%, the largest one-month increase since 1993. Both measures sit well above the Federal Reserve’s target of 2%, suggesting that consumers are now more pessimistic than policymakers.

Source: Yardeni Research

If consumers pull back on spending in response to these fears, recession could prove to be a self-fulfilling prophecy.

Small businesses are sending similar signals. The National Federation of Independent Business (NFIB) Small Business Optimism Index marked its second consecutive monthly decline in February. Meanwhile, the NFIB Uncertainty Index rose to the second highest reading ever recorded.

Source: National Federation of Independent Business (NFIB), February 2025 Small Business Economic Trends

According to the NFIB Chief Economist, “Uncertainty is high and rising on Main Street,” with inflation and labour quality ranking as the two biggest problems. Uncertainty has already begun to weigh on hiring and capital expenditure decisions, and unless it resolves, could further drag down growth.

Aggressive U.S. trade policies are clearly driving much of this uncertainty. As we have seen in past cycles, lack of clarity can paralyze corporate decision-making, disrupt supply chains, and slow capital expenditures. Should trade negotiations drag on or deteriorate further, the probability of a self-reinforcing downturn would increase materially.

In short, the bear case rests on deteriorating consumer and business confidence, rising inflation expectations, and political uncertainty. While much of this is based on “soft” data, such as surveys rather than hard economic statistics, it can still drive real-world behavior if uncertainty persists long enough.

The Bull Case

Now, on to what we think can go right from here.

After back-to-back US S&P500 equity market gains of over 20% in 2023 and 2024, what should we expect in year three of a bull market? History suggests returns tend to moderate but remain positive. As this chart shows, despite the wilder ride, net performance so far in 2025 is tracking closely to historical averages.

Source: Daily-Shot, Raymond James

Beyond the pattern of returns, hard economic data offers further support. Retail sales continue to show resilience. The Redbook Research weekly retail sales series shows that, as of mid-March, retail sales were up +5.5% year-over-year, reinforcing the view that consumers, despite political and policy-related uncertainty, are still spending.

Source: Yardeni Research

This spending strength may be in part due to the strong labour market. Weekly jobless claims remain low at 241,000. This suggests strong job growth and limited layoffs. The unemployment rate, at 4.2%, is still well below the 50-year average of 5.8%, and only modestly above the 50-year low of 3.4% reached in 1969.

On the inflation front, market-based expectations remain relatively contained. The spread between nominal Treasury yields and Treasury Inflation-Protected Securities (TIPS) suggests an inflation outlook over the next five to ten years that is very close to the Fed’s long-term 2% target. This is far less alarming than the consumer survey data would suggest and gives the Fed room to maneuver if needed.

Source: Yardeni Research

Finally, the credit markets are not flashing recession signals. High-yield credit spreads remain well within their historical norms and have not widened meaningfully despite the recent equity market volatility. Canadian spreads have been even more stable, further supporting the notion that financial stress remains contained.

Taken together, muted but positive historical patterns, resilient consumer behavior, a strong labour market, well-anchored inflation expectations, and stable credit markets form the foundation for the bull case. While uncertainties remain, the underlying economic data remains on solid ground.

Which Bear Could it Be?

So far, we have a correction. At Cumberland, we’ve managed through numerous volatile periods over three decades. Today, we’re awaiting the resolution and potential impacts of the Trump 2.0 tariffs. The bullish view may well prevail.

If downside volatility continues, we believe it’s unlikely to morph into a structural or cyclical bear market. Economic fundamentals remain strong, and interest rates are more likely to fall than rise.

Therefore, we believe that any bear market will be of the event-driven variety, with the Liberation Day tariff shock as the instigating event. Given the historic size and scope of event-driven bear markets, most of the damage is likely already done. And, as a man-made event, it could all be reversed tomorrow.

Navigating From Here

Overall, US trade policy will dictate outcomes. But given the cross currents between sentiment and data, we are tilting portfolios toward a more cautious stance. We have modestly reduced our overall equity exposure, trimming positions in areas such as technology and industrials and adding to more defensive sectors, cash, and gold earlier.

However, it is important to note: we remain invested. History teaches that staying on the sidelines can be costly. Since 1950, the S&P 500 has been higher 74% of the time on a rolling one-year basis and 85% of the time over rolling three-year periods. Missing just a few of the market’s best days can severely diminish long-term returns.

Percentage of Time S&P 500 Rose Over Rolling Perions
1,3,5,10 and 15 Years from 1950-2024

Source:LPL Research 03/11/25

Markets will continue to challenge our patience and our emotions. But in a world full of noise, our approach remains simple: eschew dogma, stay alert, lean on our long experience through many economic and market cycles, and follow the evidence through fundamental research and relevant data wherever it might lead.

When it comes to US tariffs on Canada, the headlines may paint a simple picture, but the reality is far more complex. Canada is a critical trading partner that directly supports US industries, jobs, and consumers in ways that aren’t always obvious. Here are five key facts about the Canada-US trade relationship that might surprise you.

1. The US Has a Merchandise Trade Surplus with Canada (When Energy Is Excluded)
While the overall US-Canada merchandise trade balance shows a deficit, this picture is skewed by energy imports. When energy is excluded, the US actually had a merchandise trade surplus of $28.6 billion with Canada in 2023, a trend which has held since 2007¹, driven by high-value sectors like manufacturing, machinery, and automotive parts.

Why it matters: This surplus supports thousands of American jobs and highlights how interdependent the two countries are. As Cumberland Chief Investment Officer Peter Jackson has commented, energy imports heavily influence the deficit figures, but in key sectors like manufacturing, the US gains more than it loses.

2. Canadian Crude Imports Create a Win-Win Through Refining Arbitrage
Canada exports about four million barrels of crude oil to the US every day, accounting for 21% of US daily consumption². Canadian heavy crude oil flows into US refineries at a discount that can generally be estimated at $10–$20 per barrel as compared to lighter WTI crude³. US refineries process this Canadian heavy crude into gasoline and diesel, which are sold in the domestic market at competitive prices. Meanwhile, the US exports some of its own lighter crude globally at a premium.

The takeaway: As we have noted, this refining arbitrage benefits US refiners, oil producers, and consumers by keeping fuel prices low while allowing the US to profit from exports.

3. Canada Buys More US Goods Than Any Other Country
In 2023, the US exported $449 billion worth of goods and services to Canada, making it the US’s #1 export destination⁴. From machinery to precision instruments and aircraft, Canadian businesses are major consumers of American innovation. And it’s not just confined to border states—it’s a national relationship. In fact, 36 US states, from Michigan to Texas, rely on Canada as their #1 export destination⁵.

The impact: Industries across the US depend on Canadian demand, and disruptions in trade could ripple through local economies nationwide.

4. Canadian Imports Drive US Manufacturing Efficiency
Nearly 70% of US imports from Canada are used as inputs for the production of American goods⁶. From automotive parts to metals and chemicals, Canadian imports fuel US factories, enabling them to remain competitive globally.

Why it’s important: Tariffs on Canada could increase input costs for US manufacturers, reducing their ability to compete internationally.

5. Tariffs on Canada May Hurt US Consumers More Than Canada
Because Canadian energy and raw materials play such a large role in US supply chains, imposing high tariffs would likely lead to higher costs for American manufacturers and consumers. Tariffs on key imports, like energy and automotive parts among others, could raise production costs, making American goods less competitive globally.

It’s also critical to note that, while Canada’s overall trade imbalance with the US has increased since Trump’s first term, largely driven by higher energy prices, it is still dwarfed by the imbalances with China (close to US$300 Billion) and the Euro Area and Mexico (each around US$200 billion +/-)⁷.

The twist: Canada’s close trade ties create efficiencies that directly benefit the US economy. And, while Canada has been portrayed as a major contributor to the US trade deficit—in reality, it is not. Targeting it with tariffs is more about political narratives than economic necessity.

In our view, a closer look at the trade data reveals that Canada is not just another trading partner—it’s an essential economic ally to the U.S. As tariff debates unfold, acknowledging this deep interdependence could pave the way for more strategic solutions that ultimately benefit both nations.

At Cumberland, we’re closely tracking these developments to assess their impact on markets and position our portfolios accordingly. Our focus remains on helping clients navigate uncertainty while balancing attractive investment opportunities and prudent risk management.

Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla comprise the so-called Magnificent Seven – companies revered for their high tech, high growth, high margins, and high investment returns over the past decade.

Following steep declines in 2022, the Magnificent Seven have grown so far and fast, that they currently make up close to 30% of the S&P 500 Index’s market value. As such, they can be seen as overshadowing the other 493 stocks in the index.

So with the strong stock market gains of 2023 and the first quarter of 2024, it now seems fair to ask:

“Are the current valuations of the Magnificent Seven justified?

And what about the rest of the market?”

Let’s start with earnings

The following chart shows that 73% of S&P 500 companies reported a positive earning-per-share surprise at the end of 2023, and 64% reported a positive revenue surprise. And, as highlighted in yellow, overall S&P 500 earnings grew 4.1% year-over-year.

This earnings growth was much stronger than the 1.5% market consensus, and marked the second quarter of earnings growth after three negative quarters. In short, corporate earnings took a powerful turn to the upside in the final quarter of 2023.

There’s something else to notice about these upside earnings surprises: they were driven disproportionately by the Magnificent Seven’s industry sectors, Communication Services +44.7% (Meta, Alphabet), Consumer Discretionary +34.3% (Amazon, Tesla) and Information Technology +23.0% (Microsoft, Apple, Nvidia).

Looking ahead to 2024, the next chart shows that market participants anticipate more of the same going forward, with Information Technology earnings expected to grow at +17.9% and Communication Services at +17.7%, making them materially positive standouts. Looking beyond these, the chart also demonstrates a much wider breadth of earnings growth ahead, with positive, mostly high single-digit or low double-digit growth expected in all but two market sectors. Take a closer look below.

In addition, as the next chart shows, S&P 500 calendar operating earnings growth for 2024 and 2025 have recently turned positive, after having pulled back in previous months.

So what does this mean for valuations?

Earnings are strong, but you might wonder if valuations are getting ahead of earnings. In other words, broadly speaking are S&P500 stocks relatively expensive? The next chart shows the forward 12-month Price to Earnings (P/E) valuation multiple for the S&P 500 (green line). At first glance, the current multiple of about 21.0x looks a bit rich relative to its historical near 10 year average of 18.2x. However, there is in fact some distortion in this picture when you look closer.

The P/E for the Magnificent Seven stocks (red line) is currently at 29.5x, which heavily skews the S&P 500 index, since it is a market capitalization-weighted index. That means the biggest companies have the biggest influence, and the Magnificent Seven are huge, representing about 29% of the index.
If we de-emphasize the Magnificent Seven by equal weighting the stocks in the index (purple line), the S&P 500 trades at a much more reasonable P/E multiple of 17.3x, which is barely above its long-term average of 17.1x and below near 10-year average of 18.2x.

With that, perhaps the most relevant question is whether the current multiple or valuation for the Magnificent Seven is justified. When we compare their outsized Q4 2023 earnings growth and the growth expected for 2024, the answer is yes right now.

The chart below shows the historical forward P/E ratio premium of the Magnificent Seven relative to the S&P 500, another interesting set of statistics. At its current level of 40%, the premium is large, however, it currently sits at the low end of its 9-year trading range of about 30% to 80%. The Magnificent Seven have often traded at a significantly higher premium, and as recently as last summer.

The final verdict

While we don’t own ALL of the Magnificent Seven stocks, as of this writing, we are comfortable with core positions in Apple, Alphabet and Microsoft, as well as Amazon (recently added) and Meta (sold in early 2022 and repurchased in 2023). While they command premium valuations, they are remarkably profitable businesses with the potential for continued, strong earnings growth ahead.
As for the other 493 stocks in the S&P 500, valuations are not unreasonable, particularly given the US economic outlook and expected continued earnings growth. The US Federal Reserve is still looking to ease interest rates against a backdrop of solid economic growth, low unemployment, and inflation that continues to move toward target levels as shown in the final chart below.

So to close, historically stock markets have performed well in times like these. We remain selective by sector and company, while being generally positive on the outlook for the market.

Each quarter, our Investment Management teams publish their key observations and portfolio updates across Global Equity and Fixed Income markets. This is a summary of our views for the First Quarter of 2024. You can download the full reports via the links shown below.

KEY OBSERVATIONS

During the first quarter of 2024, the S&P 500 was up +10.6% in U.S. dollars, or +13.3% in Canadian dollars. We believe that this large advance was primarily the result of a strengthening economy, growing earnings, and the expectation of rate cuts later this year.

Price/earnings multiple expansion – or an increase in what investors are willing to pay for every dollar of earnings – is not unusual at this point in the cycle. This leads to stock valuations that are higher than historical averages, however, we don’t believe they are unreasonable today.

Last week’s update by the Federal Open Market Committee of the U.S. Federal Reserve seems to support our expectation of lower interest rates in the second half of 2024. However, with recent bumps in the inflation rate, the market’s expectation of as many as six rate cuts this year has been pared back to about three. This sent mixed signals to the fixed-income markets, which saw rates drift modestly higher. However, credit spreads remained strong and returns were bifurcated, with corporate bonds outperforming their government counterparts.

S&P 500 earnings grew +4.1% year-over-year last quarter, much stronger than the 1.5% market consensus growth rate at the end of 2023. This may have been skewed by positive earnings surprises in the Magnificent 7 Technology stocks, however, it was the second quarter of overall positive earnings growth after three negative quarters, which gives us some confidence in the consensus calendar forecasts, which call for earnings to reaccelerate to double-digit levels in 2024 and 2025. Growing earnings could provide a catalyst for further market appreciation.

This is a US election year, and while we can’t rule out a pullback moving toward the November 5th election day, particularly as pullbacks of 5-10% typically happen most years at some point or another, stocks historically tend to rise regardless of which party is in the White House or controls the House and Senate.

Overall, we remain positive on the markets given that the upcoming monetary easing cycle and the decline in interest rates is likely to take place against a backdrop of solid economic growth, low unemployment, declining inflation and improving earnings.

NORTH AMERICAN EQUITY UPDATE

Peter Jackson, HBSc, MBA, CFA

Chief Investment Officer

Portfolio Manager, North American Equities

Our overall equity and cash exposure were unchanged this quarter at 95% and 5% respectively. Our U.S. equity exposure increased from 47% to 52,% while our Canadian exposure decreased from 48% to 43%. It is important to note that many of our clients’ portfolios are invested in our North American plus International Equity strategy, meaning that the actual weights of US and Canada within their equity holdings will be proportionately less than this given the allocation to international companies.

During the quarter, we continued to shift our allocation in favour of US equities (+5%) over Canadian equities (-5%). While there are pockets of strength in Canada, overall forward 12-month earnings growth remains negative in Canada as compared to positive earnings and improving breadth of earnings in the U.S. Our Canadian holdings are focused on these pockets of strength and most of the Canadian companies we own have globally diversified revenue sources despite a Canadian headquarters.

We added two new investments during the quarter:

Mastercard operates a digital payment network with integrated solutions that links consumers, banks, merchants, and merchant acquirers. Mastercard’s business is protected by a network effect as merchants are more likely to subscribe since so many consumers carry its cards, and consumers are more likely to carry a card that is accept in so many places. We think Mastercard has a long runway for growth as they benefit from the ongoing secular shift from cash to electronic payment, especially outside of North America, and the continued adoption of their value-added services, which include fraud detection, data analytics, and loyalty programs.

O’Reilly Automotive owns and operates automotive part distribution warehouses and retail stores predominantly in the United States, but also in Mexico and Canada. O’Reilly serves both the do-it-for-me (pro) market as well as the do-it-yourself (consumer) market through its 5,600 stores. O’Reilly has 30 distribution centres located in 30 major cities, and it has used its distribution advantage to build out its pro business, which now makes up 45% of its revenues. As a result, O’Reilly has better inventory turns, working capital management, and higher return on invested capital compared to most of its peers.

A detailed review of each company can be found in the full report per the link above.

GLOBAL EQUITY UPDATE

Phil D’Iorio, MBA, CFA
Portfolio Manager, Global Equities

Global equity markets started off 2024 with a bang. Some of the drivers were strong corporate earnings, anticipated interest rate cuts, and a turnaround in investor sentiment. Given this backdrop, stock market returns were strong across many geographic regions.

About a year ago, economists and investors were forecasting a U.S. recession due to the impact of stubborn inflation and higher interest rates. In March of 2023, approximately 65% of economists polled by Bloomberg were convinced the U.S. economy was headed for a serious downturn within 12 months. This widely held viewpoint has completely reversed.

Given the resilience of the U.S. economy and a significant decline in inflation, economists and investors have now largely abandoned their “hard” or “soft” landing recession predictions. Indeed, 45% of now believe the U.S. economy is headed for a “no landing” scenario, where inflation falls towards the Fed’s 2% target and economic growth remains firm.

Outside of the United States, the global economy is growing, although it remains sluggish across many parts of the world. Markets are now expecting the European Central Bank to cut rates in June, which should help the recovery across the Eurozone. In China, the economy remains weak but there is some recent evidence of positive momentum.

Good news has continued to come out of Japan, as its central bank raised interest rates for the first time since 2007. This is viewed as a sign that Japan may have finally won its fight against deflation, with prices now rising consistently for the first time in decades.

Overall, we are seeing encouraging signs across the largest economic regions outside of the United States and continue to have a favourable outlook for global equity markets.

We added several new investments across a variety of industries during the quarter, including Alimentation Couche-Tard, Mastercard, O’Reilly Automotive, and Vertex Pharmaceuticals in the Global portfolio, and Icon, Inditex, Itochu, Mastercard, and Shin-Etsu in the International portfolio.

A detailed review of each company can be found in the full report per the link above.

Recall that in last quarter of calendar 2023 the yield curve decreased markedly (and as you readers and investors know, when yields drop, bond prices rise). The resulting bond price rally that occurred was the strongest quarterly return performance by Canadian bonds in over 20 years. At the time, some believed there was a reasonably good chance interest rate cuts by the Canadian and US central banks might start as early as March 2024.

It would be difficult to repeat such a strong performance, as a result, the first quarter of 2024 always had a tough act to follow and the bond market return performance was in fact a mixed bag. Interest rates drifted slightly higher (see Canadian Yield Curve chart below), which is a negative factor for bond return performance. Inflation continued to trend downwards at a slower than anticipated pace, but the Canadian economy remained stronger than expected with a very modest beat in GDP growth in January (the latest data released), thus creating the environment for mixed bag return profile.

After delivering robust returns in 2023, global equity markets started off 2024 with a bang. Some of the key factors driving the returns included strong corporate earnings, an expectation of interest rate cuts in 2024, and a turn in investor sentiment with investors abandoning their recession calls. Given this backdrop, stock market returns were not only strong, but also widespread across geographic regions.