If one word defines the investment landscape over the past year, it’s uncertainty- driven by global trade, shifting tariffs, geopolitical conflicts, central bank policy and concerns about the global economy. Yet, despite this backdrop, broad equity indices continue to reach new highs. So, what’s behind the resilience?
The sharp sell-off in equity markets earlier in the spring, sparked by escalating trade tensions and sweeping tariffs announced by President Trump, proved to be short-lived. Markets recovered as some tariffs were delayed, and trade negotiations commenced, with outcomes for several countries ultimately less severe than initially feared. Adding to the momentum, a dovish shift in tone from Fed Chair Powell at the Jackson Hole meeting in late August gave investors renewed confidence, helping to push stocks even higher.
Last Friday, the U.S. Court of Appeals upheld a prior decision by the Court of International Trade, ruling that most of President Trump’s tariffs, specifically the reciprocal tariffs imposed under the International Emergency Economics Powers Act (IEEPA), are illegal. The court allowed the tariffs can remain in effect through October 14, providing the Trump administration with time to file an appeal with the U.S. Supreme Court.
The Fed’s Dual Mandate
The delayed effects of tariffs have been a key factor in the U.S. Federal Reserve’s decision to pause further rate cuts this year. The Federal Reserve’s dual mandate is to conduct monetary policy to achieve maximum employment and stable prices. Although inflation has cooled, it remains above the Fed’s 2% target. Tariffs, particularly on imported goods, are expected to contribute to additional upward pressure on prices, complicating the Fed’s policy outlook.
Coincidently, the U.S. labour market has remained relatively strong this year, with the unemployment rate holding steady around 4.2%, giving the Federal Reserve additional justification to hold off on further rate cuts. However, July’s labour data pointed to a softening in the employment situation. Payroll growth for the month fell well short of expectations, and significant downward revisions to the prior two months erased a notable portion of earlier job gains. In response to the weaker jobs data, market expectations for a rate cut by the U.S. central bank increased sharply.
The notion of a “Fed Put” was reinforced by Fed Chair Powell’s Jackson Hole speech where he expressed growing concern about signs of labour market weakness and indicated a willingness to cut rates as a form risk management. While acknowledging that the labour market appears balanced, he noted it is a curious kind of balance that results from a pronounced slowing in both the supply of and demand for workers. His remarks point to a combination of cyclical and structural forces weighing on hiring from both supply and demand sides, including aging demographics, tighter immigration, and rapid technological change.
The Bank of Canada (BoC) has held interest rates steady since March, following a cumulative reduction of 225 basis points. Compared to the U.S., inflation in Canada has been relatively subdued, while the unemployment rate remains elevated – the most recent reading coming in at 6.9%. Ongoing uncertainty around rising costs from tariffs and shifting trade dynamics has led the BoC to take a cautious approach to further policy moves. However, the recently announced rollback of retaliatory tariffs on most U.S. imports has eased concerns about tariff-induced inflation and could pave the way for rate cuts this fall, especially in light of a soft labour market and slowing economic growth.
Politics and Capital Markets
The growing involvement of the U.S. government in capital markets marks a concerning shift. In an unusual move on August 22, the government announced an $8.9 billion investment for a 10% equity stake in Intel. This stake is being funded through a combination of $5.7 billion in previously awarded but undisbursed grants to Intel under the U.S. CHIPS and Science Act and an additional $3.2 billion allocated through the Secure Enclave program. The investment is structured as passive ownership, with no Board representation. The U.S. government paid $20.47 a share, a 17.5% discount to the closing stock price when the transaction was announced. The American taxpayer got a “deal” in the transaction. Still, the move is an unprecedented interference- a direct equity stake in a company that isn’t in dire straits, as banks were during the 2008 financial crisis. When announcing the deal, President Trump promised to do more like it in the future, signaling a potential expansion of federal involvement in corporate America.
Even more concerning is President Trump’s attempt to fire Federal Reserve governor Lisa Cook on August 25, raising questions about the central bank’s independence from White House influence. President Trump has accused Governor Cook of committing mortgage fraud in 2021 about a year before her appointment to the Fed, an allegation he claims as “for cause” dismissal. In response, Governor Cook has sued the Trump administration, launching a legal battle. Notably, the market’s response to President Trump’s move was relatively subdued, suggesting that investors expect interest rate cuts to resume regardless of the outcome. However, if President Trump’s effort succeeds, it could significantly alter perceptions of the Federal Reserve’s autonomy. Over the longer term, this raises the risk of greater inflation volatility, as interest rate decisions may be seen as increasingly influenced by political consideration rather than purely economic data.
Outlook
The U.S. economy has performed better than initially expected following the announcement of tariffs in April, largely because the delayed implementation means their full impact has not yet been felt across the economy. GDP in the second quarter was up 3.3% and is expected to rise 3.5% in the third quarter. The potential impact of trade tariffs on consumer sentiment and economic growth remains a concern, however, expectations of lower interest rates in the coming months are helping to ease these fears.
Stronger-than-expected corporate profits for the S&P 500 companies have provided support for stock prices. In the second quarter, earnings per share (EPS) rose 13.2%, significantly outpacing the consensus estimate of 5.8% growth ahead of the financial reporting season. For the year, EPS growth projections have been revised upward to 10.5%, up from 8.5% at mid-year. As broad equity indices hit new highs, sustained price gains will depend on future growth expectations being met or surpassed.
The pro-business measures included in the One Big Beautiful Bill Act (OBBBA) enacted in July, are expected to serve as a net positive tailwind for markets through 2026 -especially in sectors with significant capital expenditure (capex) and research & development (R&D) budgets. The immediate expensing of domestic capex and R&D between 2025/26 stands to benefit companies in software, media & entertainment, and pharmaceuticals, as well as the large U.S. hyperscalers investing heavily in AI and datacenters domestically. U.S. defense companies are also set to gain from increased government spending and favourable tax treatment. Companies will have flexibility in how they deploy the resulting tax savings and enhanced free cash flow – whether reinvesting in growth initiatives, returning capital to shareholders through dividends or buybacks or strengthening their balance sheets. We expect to see more commentary from management teams in the months ahead as they assess the implications of OBBBA for free cash flow and capital allocation strategies.
Our emphasis on large capitalization stocks with a global footprint has been effective in navigating shifting trade dynamics and tariffs. International companies typically benefit from diversified, flexible supply chains and the financial capacity to adapt and invest in innovation.
We remain committed to building long-term wealth for our clients by investing in a well-diversified portfolio of financially strong, well-managed and reasonably valued companies.
