Markets Commentary: First Quarter 2025

Canadian equity markets

The Canadian equity market advanced 1.51 percent in the first quarter of 2025, as measured by the S&P/TSX Composite Index, and returned 15.81 percent for the year. During the quarter, the actualization and then delay of Trump’s trade tariffs and the counter tariffs by the Canadian government were strong headwinds to the Canadian economy. Healthcare and Information Technology were the most negative sectors in the quarter, while Materials and Utilities did well. Materials in particular were up 20.33 percent for Q1. The end of the tax holiday, as well as the start of Trump’s trade war, have led to a new inflation spike. Bank of Canada has put a pause on future rate cuts for now.

U.S. equity markets

Trump’s chaotic policies have erased the optimism generated by his election victory. The U.S. market returned -4.2 percent in term of Canadian dollars, performing worse than the Canadian market, the International market and the Emerging market. For the 1-year, the S&P 500 returned 15.1 percent. For the quarter, value outperformed growth for all market cap ranges. Midcap equities, captured by the Russell MidCap Index, were the best-performing market cap range, despite the overall negative performance for the S&P 500 Index. Seven out of 11 sectors were positive. Energy (10.21 percent) and Healthcare (6.54 percent) were the best performing while Consumer Discretionary (-13.80 percent) and Information Technology (-12.65 percent) were the worst. Overall, the U.S. economy retreated significantly in Q1.

International equity markets

International equity markets, as measured by MSCI EAFE, returned 6.94 percent for the quarter, outperforming both U.S. and Canadian equities. Europe was the best performing with a 10.56 percent return for the quarter and 13.66 percent return for the year, while Japan was the worst performing, with 0.41 percent return for the quarter and 4.12 percent return for the year. The emerging market returned 3.00 percent for the quarter, 14.96 percent for the year. China contributed to overall emerging market performance. India, Indonesia, Thailand and Taiwan were negative for the quarter with growth concerns impacting their markets.

Fixed income performance

Both the Fed and BoC have signaled that they will pause cutting rates in the first quarter of 2025. The FTSE Canada Universe Bond Index returned 2.02 percent for the quarter and is up 7.65 percent for one year. Higher yielding corporate bonds as measured by the FTSE Canada Corporate Bond Index returned 1.81 percent for the quarter and 8.84 percent for one year. Canadian Real Return Bonds (RRBs) returned 3.45 percent for the quarter and 9.29 percent for the year.

The challenges facing the Fed remaining in 2025 are the effects of Trump’s trade war, his attack on the Fed chair and the effect of DOGE on large number of jobs. The Bloomberg Barclays U.S. Aggregate Bond Index was up 2.78 percent (USD) for the quarter and up 4.88 percent (USD) for the year, the Bloomberg Barclays U.S. Government Bond Index returned 2.91 percent (USD) for the quarter and 4.53 percent (USD) for the year, and U.S. Corporate High Yield Index returned 1.0 percent (USD) for the quarter and 7.69 percent (USD) for the year.

For a Canadian investor holding a “balanced” portfolio of 40 percent in Canadian bonds and 20 percent in each of the Canadian, U.S. and International stock markets, returns would have been 1.6 percent for the quarter, 11.7 percent for the year and 9.8 percent annualized for the past five years ending March 31, 2025.