Investment update

Weekly insight into the marketplace.

2025 outlook

Our fund company partner, Addenda, has a strong reputation as a multi-asset investment firm. As 2024 comes to a close, Ian McKinnon, Addenda’s Chief Investment Officer, shares his insights on the current and future economic and market landscape heading into 2025.

How would you describe the Canadian market outlook for 2025?

Our internal view is a little different than the consensus view that’s out there. Growth is slowing a little bit, but overall, it’s positive and we’re not forecasting a recession. Some of the newspaper headlines have mentioned the unemployment rate rising. Unemployment has risen, but that’s because our labour force has increased with immigration. People aren’t getting laid off or losing their jobs. The labour force has increased, and we don’t see that as a negative. The underlying economy is in pretty good shape. We’re also getting dragged along by a very strong U.S. economy, with them being our biggest trade partner. Our expectation for next year is about 2% GDP growth in Canada and around 2.1% for the U.S. We see both economies continuing to chug along.

Has that changed much with the incoming Trump presidency?

Trump, at his base, is a capitalist and he likes to grow the economy. Markets have reacted positively in the short term, and we’ll see how it plays out as we get into the first half of 2025. Historically, he’s shown that he’ll throw out things like the 25% tariffs on Canada and Mexico, but I don’t think that will come into play. He’s using it as a negotiating tactic. Tariffs are generally inflationary and negative for economic growth. In U.S. history, we’ve never seen a sitting president cause a recession due to policy. Trump, more than others, will be sensitive to that. He might talk a good game, but he’s not going to push the economy into recession just to start a trade war.

What does the path for the Bank of Canada and The Fed look like through the next 12 months?

I know there are some economists calling for a fair bit more of a reduction in interest rates from the Bank of Canada and the U.S. Federal Reserve (the Fed), even getting down into the 2 to 2.5% range. We’re not there. We don’t think that the economy requires that type of monetary policy. Our view is that the Bank of Canada might cut one more time, which would take them to 3.5%, and I would argue that’s close to our view of a neutral monetary policy. We don’t feel that they need to be aggressive in cutting rates. With the Fed, our call is for them to get to 4%. They were at 5.5% and they’ve cut 0.75%, so we expect about another 75 basis points of cutting from them.

Are we really through the worst of inflation?

In the U.S., the answer is yes. They’ve had a real surge in productivity, or the output per workhour. That’s offsetting any kind of wage inflation. We don’t have that phenomenon in Canada. We have the opposite, with negative productivity. We’re producing less per hour worked. The reasons behind it are complicated, but we just don’t have the same amount of business investment.

When you look at the Canadian CPI, and break it down into goods and services, we saw goods inflation flare in 2021 and 2022. Year-over-year that has come right back to zero. On the other hand, services inflation – which includes sectors like hospitality, travel and mortgages – is still a little high. That’s why we think the Bank of Canada should be easing interest rates less aggressively. There’s still a little hint of inflation in the Canadian marketplace.

The TSX was largely on par with the U.S. benchmarks through 2024. Can we expect that to continue?

Our view of U.S. markets, when we look at 2025, is for a high single-digit return. We’re expecting a 9.5% to 10% increase for the S&P 500. We think that the U.S. will continue to be the top performer, with Canada coming in a close second at 7.5% to 8%, and international equities lagging a little.

One of Trump’s mantras is: “drill, baby drill.” Trump is big on promoting and increasing U.S. oil production. That might bring the price of oil down a bit as more supply comes online. Obviously, for the Canadian economy, we’d rather see the price go higher. That could offset where some of our energy and material stocks might be a little weaker.