Capital Markets Overview
- Capital Markets continued to perform well in 2025. For the third year in a row, Equities generated strong returns. Fixed Income performance was more subdued.
- Equity market gains generally reflected relief that severe corporate/economic impacts from tariffs did not materialize.
- Canada was one of the world’s strongest performing Equity markets, outperforming the US and most International Markets.
- The Canadian Bond Universe, covering both Government and Corporate bonds of all maturities, advanced a modest +2.1% in 2025.
2025 Equities Commentary
- The strong Equity gains in 2025 were not without extreme volatility, driven largely by trade‑war tensions. In April, the S&P 500 fell nearly 20% from its highs and experienced extraordinarily large intra-day swings.
- Canadian Equities (S&P/TSX) surged +31.7%, led by Materials on soaring precious‑metal prices, with the Gold Index up about +130%. The Canadian Banks also gained about +40%.
- US Equities (S&P 500) returned +17.9% in USD terms, but the Loonie’s +5% appreciation eroded that to just +12.4% in CAD terms. While the AI theme remained prevalent and drove meaningful gains, performance was somewhat broader-based than the hyper-concentrated “Mag 7” returns of 2023/24.
- Global Equity returns were very solid overall, with the MSCI World Index up +17.1%, led by developed markets outside North America (EAFE Index) which gained +25.7%.
2025 Fixed Income Commentary
- The Canadian Bond Universe delivered modest gains of +2.1% in 2025, with Short‑Term Bonds (+3.8%) again outperforming Long‑Term Bonds (-1.3%).
- Investors were rewarded for taking credit risk, as Corporate Bonds (+4.3%) outpaced Government Bonds (+1.5%).
- The Bank of Canada’s overnight rate is now at 2.25% (down from 3.25% a year ago) and significantly lower than its 5.0% peak in 2023.
- Despite the significant rate cuts, long‑term bond yields have drifted slightly higher while short‑term yields have compressed toward the policy rate, restoring a more normal yield curve with longer‑term rates above short‑term rates.
2025 Economic Review
- Central Banks continued to ease their monetary policy and cut interest rates in 2025. The Bank of Canada cut its policy rate to 2.25% (from 3.25% at the start of the year) and the US Fed cut its policy rate to 3.75% (from 4.5%).
- The 2025 “Trump Tariff” saga saw numerous headline‑grabbing threats of very high tariffs, but negotiated deals and temporary tariff reductions helped ease the worst‑case fears (even though overall tariff levels remain historically elevated).
- While Canada and the US have not reached a renewed trade deal and tensions remain, the majority of Canada’s exports to the US were protected under the Canada-US-Mexico Agreement (CUSMA).
- The Canadian Dollar strengthened to $0.729 from $0.694 (up +5%) on the year.
- Despite the tariffs, inflation remains under control on both sides of the border. Canada’s inflation is currently at 2.2% (near the Bank of Canada’s 2% target), while U.S. inflation has eased to 2.7%.
- The Canadian Economy has remained resilient although it is starting to show signs of weakness. GDP growth is forecasted to be about 1.7% in 2025. US GDP growth is expected to come in around 2.0% for the year while Global GDP growth is forecasted to be about 3.2% for 2025.
- Although Canadian unemployment appears mostly unchanged year-over-year (6.8% now versus 6.7%), this is partially masked by immigration policy changes that reduced the labour force participation rate.
- The US unemployment rate increased from 4.0% to 4.4% during the year.
2026 Economic Outlook
- With Canada and US inflation largely contained and continued economic growth projected, both Central Banks are expected to keep policy rates near current levels through most of 2026 (though modest additional easing in the US is anticipated).
- 2026 GDP growth forecasts for Canada and the US are about 1.5% and 2.2%, respectively.
- Canada’s economic outlook is tempered by uncertainty around its trading relationship with the U.S., which remains unresolved. As Canada and the U.S. head into the scheduled CUSMA review, anticipated outcomes range from maintaining the current framework to potentially more challenging terms for Canadian exporters and investors.
- The Trump/Global geo-political landscape remains fragile and poses additional economic uncertainty (i.e. Russia, Ukraine, China, Middle East, Venezuela, Greenland).