Markets Commentary: Second Quarter 2025

Overview of the global economy

Global markets climbed higher in Q2, led by a recovery in U.S. growth stocks. The S&P 500^® has gained over 20 percent since April’s “Liberation Day” tariff announcement when it was down -15 percent. Despite uncertain global economic conditions and intensifying geopolitical tensions, risk assets were mostly positive in the quarter and year to date.

The Bank of Canada put rates on pause through the second quarter, holding the overnight rate at 2.75 percent. As expected, the U.S. Federal Reserve (the Fed) held rates steady at 4.25–4.50 percent through Q2 with two rate cuts expected by year-end, according to the dot plot (see page 4 of the Fed’s Summary of Economic Projections).

Canadian GDP increased 0.5 percent in the first quarter (the most recent data available), and 2.3 percent year over year, the same pace as in the fourth quarter of 2024. Exports drove growth as the threat of U.S. tariffs influenced trading patterns and encouraged importers to increase shipments prior to tariff implantation. The annual inflation rate in Canada, as measured by CPI, was 1.7 percent in May, unchanged from the previous month.

U.S. GDP decreased at a revised annualized growth rate of -0.5 percent in the first quarter (the most recent data available). driven by a surge in imports, along with a reduction in government spending. May’s CPI increase of 0.1 percent came in lower than expected as annual inflation rose to 2.4 percent. The Fed’s preferred measure of inflation, core Personal Consumption Expenditures increased by 0.1 percent in May with an annualized inflation rate of 2.3 percent. The ISM Manufacturing PMI survey results remained steady at 49 (below 50 indicates economic contraction) with improvements in inventories and production. The health of the labour market remains resilient, as the economy added a higher-than-expected 147,000 new jobs in June with the unemployment rate falling to 4.1 percent from 4.2 percent. The Conference Board Consumer Confidence Index survey indicators fell in June given weaker expectations.

Canadian equity market

The Canadian Equity Market advanced 8.53 percent in the second quarter of 2025, as measured by the S&P/TSX Composite Index. The index has returned 10.17 percent year to date and 26.37 percent year over year.

Information Techology was the top-performing sector for the quarter, producing a return of 14.24 percent. This was followed closely by Consumer Discretionary at 14.05 percent and Financials at 12.14 percent. All Canadian sectors were positive for the quarter. The Energy Sector Index contributed the weakest return for Q2 at 1.29 percent.

On April 28, the Liberal Party of Canada lead by Mark Carney won the federal election. This is A fourth straight term for the Liberals, forming a minority government for a third consecutive election. Post the Canadian election, trade, tariffs and geopolitical challenges continued to dominate the news cycle.

U.S. equity markets

U.S. equities rebounded from a challenging Q1 with a 10.94 percent return in Q2 as measured by the S&P 500 Index^® in USD. The index has returned 6.20 percent year to date and 15.16 percent year over year. The S&P 500^® reached an all-time high of 6205 on the last day of the month.

On a sector basis for the quarter, Information Technology at 23.71 percent and Communication Services at 18.49 percent were the top contributors. Energy at -8.56 percent, Health Care at -7.18 percent and Real Estate at -0.07 percent were the negative sector contributors in Q2. On a year-to-date (YTD) basis, the only negative portion of U.S. markets remains small capitalization stocks (Russell 2000 Index at -1.79 percent YTD).

International equity markets

International equity markets, including both developed and emerging regions, were positive for the second quarter. EAFE produced a local currency return of 4.8 percent for Q2, is up 7.83 percent year to date and 8.04 percent year over year. EM was positive 7.93 percent in LC in Q2. Year-to-date the MSCI Emerging Markets Index produced a return of 10.79 percent, with a 12.92 percent return year over year. Both developed and emerging regions have outperformed the U.S. on a year-to-date basis.

Fixed income markets

Canadian bond market returns were mixed for the quarter. The FTSE Canada Corporate Bond Index produced a positive return of 0.45 percent in Q2. The FTSE Canada Government Bond Index fell -0.90 percent and the FTSE Canada Universe Index decreased by -0.57 percent in Q2. The FTSE Canada Universe Index is up 1.44 percent year to date and 6.13 percent year over year.

The U.S. bond market shrugged off macro concerns around fiscal deficits, inflation and tariffs. Amidst this backdrop, fixed income returns were positive. The Bloomberg U.S. Aggregate Index was positive 1.22 percent in Q2, 4.02 percent year to date and 6.08 percent year over year. U.S. Investment grade, high-yield and mortgage-backed securities all saw slightly tightener spreads contribute to positive results across the bond spectrum.

Looking ahead

A positive quarter for stocks provided a reason for optimism. However, a return of market turbulence would not be surprising given continued trade/tariff challenges, political developments, such as the passage in the U.S. of the “One Big Beautiful Bill” and stretched equity valuations.

In the face of any ensuing heightened volatility, we continue to advise institutional investors to retain a disciplined approach by focusing on asset allocation and rebalancing as appropriate.