Global Equity Weekly

February 28, 2025 | 16:30

In Love or Trade War?

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Equity markets dipped this week as tariff concerns continue to weigh on sentiment. The latest word—and who knows where we'll be by Tuesday—is that the March 4th timeline for wide-ranging tariffs on Canada and Mexico remains in place, while threats have been broadened to Europe as well. The S&P 500 fell 1.0% on the week, while the TSX added 1.0%. The on again, off again nature of U.S. tariff threats has started to noticeably frustrate markets, businesses and policymakers. The longer this plays out, the more likely it becomes that otherwise favourable economic and financial market conditions become bogged down in uncertainty—it might be starting to show.

We’ve long highlighted that disinflation-era rate cuts and a firm economy are about as good an environment as one can find for equities, and they’ve been responding as such. This week, a run of solid earnings from the Canadian banks capped off another robust quarter for corporate profits overall. With almost all of the S&P 500 now reporting their Q4 results, earnings are on pace to rise 16% y/y, up from 9% y/y expected at the start of the year. And, while U.S. valuations might be considered rich, they still look attractive in Canada. The problem, of course, is that tariffs are negative for growth and inflation, running directly counter to the conditions that have been in place for stocks.

Source: Bloomberg

Bond yields fell sharply this week on some mixed economic data, and the market might be building in a bigger and more immediate tariff impact on growth than on inflation —such is our view. Ten-year Treasury yields have now rallied more than 50 bps since mid-January, while the Canadian yield curve out to 10 years is again sitting below 3%. Such a negative growth impact would be especially apparent in Canada, which is a shame because our positive contrarian view of the Canadian economy was playing out loudly into January. Growth clocked in at a stronger-than-expected 2.6% a.r. in Q4, with the best non-pandemic domestic demand performance since 2017

The Canadian economy is indeed responding well to past rate cuts in early-cycle fashion. Consumer spending has found momentum; real estate has found stability at the national level; employment growth accelerated through the turn of the year; while real wage growth has risen to the strongest pace since at least the early 1990s by some measures. The problem, of course, is that uncertainty is extremely high and could begin to weigh on business investment even absent any new tariffs. The CFIB noted a pickup in pricing expectations for the year ahead in January, while some measures of policy uncertainty have risen above pandemic levels in Canada. Just more examples of favourable conditions getting clouded by a potential trade war.

Major Index Performance

North American Sector Performances

(% change over period)

Table 1 - S&P 500 Sector Performance

Source: BMO Economics, Bloomberg

Table 2 - TSX Sector Performance

Source: BMO Economics, Bloomberg

TSX Relative Sector Performance

(relative to the index, year-ago = 100; dashed line = 200-day m.a.)

S&P 500 Relative Sector Performance