David Alexandre Brassard

The “Trump effect” is weighing on the Canadian economy as 2025 begins. The spectre of tariffs loomed as early as December 2024, following comments by the incoming 47th President of the United States, who will be sworn in on January 20. Like many other experts, David-Alexandre Brassard, chief economist at CPA Canada, urged the Bank of Canada to further lower its interest rate on December 11, citing threats of tariffs and rising unemployment. 

“A 50-basis-point rate cut would ease the strain on the economy and help us face upcoming economic challenges,” Brassard said. The Bank of Canada followed suit, reducing its key policy rate to 3.25 per cent on December 11. Its next rate announcement is scheduled for January 29. 

Wealth concentration 

Sébastien Mc Mahon

In financial markets, new investment trends are emerging. At the Market Outlook 2025 webinar hosted by the Cercle finance du Québec on January 15, Sébastien Mc Mahon noted that “a significant amount of wealth is concentrated in just a few stocks.” 

Mc Mahon, vice-president, asset allocation at iA Global Asset Management (iAGAM), and chief strategist, senior economist, and portfolio manager at iA Financial Group, moderated the event, which also featured François Bourdon, managing partner at Nordis Capital, a responsible investment management firm, and Jules Boudreau, principal economist at Mackenzie Investments

François Bourdon predicts the S&P 500 index will decline in 2025 due to the high price-to-earnings ratios of major companies like Apple, Walmart, Costco, and Carrefour, the French counterpart to Amazon. “Their results don’t justify exceptional growth,” says Bourdon. 

Francis Gingras Roy

In an interview with Insurance Portal, Francis Gingras Roy expressed little concern about the valuation of U.S. stocks. The senior investment advisor at Manulife Wealth believes the U.S. equity market will outperform Canada and international markets. 

However, Gingras Roy pointed out that the strong U.S. dollar remains a hurdle for Canadian investors. As of January 17, the Canadian dollar was worth just 69 cents USD. “Ignoring currency exchange, we would suggest an overweight in U.S. equities. But when factoring in exchange rates, it’s expensive to buy U.S. stocks. You lose 40 per cent on currency conversion when translating them back to Canadian dollars,” he explains. 

For investors seeking alternatives, hedged funds that protect against currency risk are an option. These funds’ returns are unaffected by currency fluctuations, Gingras Roy notes. “It’s a good way to gain exposure to the U.S. market,” he adds. 

Small-Cap stocks 

François Bourdon also sees 2025 as a year for the resurgence of overlooked equities, including those within the MSCI EAFE index and small-cap stocks. The industrial and energy sectors, especially electricity, are expected to benefit. “We’ll see many acquisitions coming out of the U.S.,” he adds. 

Julian Abdey

At Capital Group, equity portfolio manager Julian Abdey also predicts small-cap stocks will perform well. In a recent Capital Group report titled Where to Invest When Interest Rates Are Falling, Abdey emphasized that small- and mid-cap stocks remain attractively valued compared to large-cap stocks. 

Small- and mid-cap stocks refer to companies with market capitalizations of $20 billion USD or less, as per Capital Group’s guidelines. With declining interest rates, these companies stand to gain from lower borrowing costs. “Falling interest rates tend to benefit some SMID-cap (small mid-cap) companies such as those in the biotechnology sector, and I think there could be a broadening away from a handful of technology stocks,” Abdey says. 

He urges investors to be selective and offers a suggestion. “There are also SMID-cap companies integral to the AI boom, particularly in the industrials sector, thanks to the intense energy needs of the data centres required to power AI. Hammond Power Solutions (HPS), which manufactures dry-type transformers in various sizes that are used in data centres, is one example,” Abdey observes.

Corporate Bonds 

Damien McCan

Corporate bonds continue to offer attractive yields, according to Capital Group. High-yield corporate bonds, issued by businesses, are yielding approximately 7 per cent, the firm adds. Companies have generally managed their debt well during the period of high interest rates, with default rates expected to remain low. 

“Companies have broadly reported healthy earnings, and their debt levels are reasonable,” explains Damien McCann, portfolio manager for Capital Group Multi-Sector Income Fund. Compared to U.S. Treasury bonds, McCann believes investors can still benefit from higher yields offered by investment-grade (rated BBB- or Baa3 and above) and high-yield corporate bonds. 

The fire has been extinguished 

Mackenzie Investments plans to adopt a more tactical approach in early 2025, says Jules Boudreau. “The fire has been extinguished,” Boudreau remarked, referring to the strong market growth seen in 2024. The economist expects a “return to neutral in equities” and highlights the high valuation of U.S. stocks. “We are overweight in bonds on the duration side. We believe long-term bonds offer opportunities in the U.S.,” he explains. 

“In 2025, the risk of a recession becomes much clearer, with the prospect of aggressive tariffs,” adds Boudreau, who remains among those forecasting no recession this year. “We expect solid growth in 2025, but at a slower pace than in previous years,” he says. 

“The Canadian economy stumbled last year, and we expect the same for this year,” says Francis Gingras Roy. He notes that Canada experienced the steepest interest rate cuts. “The bond portion of the portfolio will be less and less rewarding.” However, Gingras Roy advises investors approaching retirement to maintain a portion of their portfolio in fixed-income securities. This allows them to draw income without liquidating equities in a declining stock market environment.