Financial Letter - Fourth quarter 2025

The fourth quarter of 2025 illustrated the financial markets’ ability to advance in an environment marked by heightened volatility, monetary policy adjustments and persistent questions about global growth. It was a quarter that called for selectivity, as investors contended with occasionally conflicting economic signals, further concentration of index returns, and expectations surrounding artificial intelligence, which played a central role. 

Global markets continued to rise in October, supported by strong corporate earnings and continuing risk appetite. U.S. mega caps, dependent on massive investments in artificial intelligence, continued to capture investors’ attention. At the same time, North American central banks adopted a more cautious tone after cutting their key rates further. 

Even so, November saw an increase in volatility. After a difficult start, especially for the technology sector, the markets rebounded in the second half of the month on expectations of new rate cuts by the U.S. Federal Reserve. Despite incomplete economic data and heightened uncertainty, risk appetite gradually recovered as investors adjusted their expectations for the U.S. rate path. 

In December, the markets continued the trends seen earlier in the quarter: a combination of equity market resilience, monetary policy support and increased caution in a context of high valuations. The global equity markets advance modestly on the quarter, but with divergences between regions and asset classes. 

Throughout the fourth quarter, stock markets posted positive performances. Canada’s S&P/TSX Index gained 6.3%. In the United States, the S&P 500 Index rose 1.1% in Canadian dollars. International developed markets, as measured by the MSCI EAFE Index, rose 3.4%, while emerging markets were up 3.2% in Canadian dollars. 

  Sources: FTSE International Limited, S&P Dow Jones Indices LLC and MSCI Inc.

Sources: Bank of Canada, Bloomberg Finance L.P.

Source: Trust National Bank.

* Effective October 25, 2024, the International Equity Fund acquired assets from the FÉRIQUE Asian Equity Fund in a reorganization and the investment objectives of the Fund were changed. The performance prior to the effective date of the reorganization represents the performance of the FÉRIQUE European Equity Fund (now the FÉRIQUE International Equity Fund) with its prior investment objectives. The reorganization and the investment objectives changes could have materially affected performance of the Fund had they been in effect throughout the entire performance measurement period.

Canadian fixed income

The FTSE Canada Universe Bond Index was down 0.3% on the quarter as the Canadian bond market adjusted to economic and monetary expectations. The Bank of Canada maintained a cautious approach, lowering its key rate at the end of October and then keeping it at 2.25% in November. Its stance reflected a delicate balance between contained inflation and economic growth that remained subdued. 

After gross domestic product declined in August, the third-quarter results offered a pleasant surprise, with annualized growth of 2.6% allowing the Canadian economy to avoid a technical recession. This performance was supported by higher crude oil exports and public investment in infrastructure, although uncertainties related to U.S. tariffs continued to weigh on business confidence. 

Against this backdrop, the Canadian bond market remained in positive territory for the year as the FTSE Canada Universe Index benefitted from lower key rates and investors’ search for stability.

U.S. fixed income 

The U.S. bond market was affected by changing expectations for the Federal Reserve’s monetary policy. After another 25-basis-point cut  in October, Chair Jerome Powell’s comments were interpreted as more cautious, suggesting that the easing cycle could be nearing its end in 2025. 

In November, the absence or delay of some economic data owing to the prolonged federal government shutdown complicated any assessment of the pace of the U.S. economy. Even so, indications of weaker-than-expected data reinforced expectations of a further rate cut as early as December, which materialized in another 25-basis-point reduction, supporting demand for U.S. Treasuries. Investors continued to favour quality securities in an environment of limited economic visibility. 

The U.S. bond market generally benefitted from renewed interest, offering both income and diversification in an environment marked by high equity valuations and persistent uncertainty. 

Canadian equities 

The S&P/TSX Composite Index advanced 6.3% in the fourth quarter, outperforming a number of developed markets. The return was driven by a combination of sector and macroeconomic factors. 

The gold sector played a major role, with the rising price of gold driving the performance of many mining stocks. Conversely, the energy sector was penalized in December by weak oil prices, although the overall impact on the Canadian market was limited.  

Domestic economic data also supported investor sentiment. Surprise GDP growth in the third quarter reinforced the idea that the Canadian economy could weather a slowdown without entering a recession. That being said, ongoing trade tensions with the United States and weak consumer confidence continued to limit the medium-term growth outlook. 

U.S. equities 

In the fourth quarter, the S&P 500 Index advanced a modest 1.1% in Canadian dollars. The quarter saw increased volatility amid growing scrutiny of the tech sector’s high valuations and the degree to which massive investments in artificial intelligence can generate tangible returns in the short term. 

In October, the U.S. markets enjoyed a strong earnings season, with a large majority of companies beating analyst expectations. Mega caps, including Amazon, played a pivotal role in the market dynamics. Still, some AI-related stocks sold off in November, illustrating investors’ doubts about the pace at which such investments can be monetized. Another factor was the continued uncertainty over trade policy, with many U.S. companies still challenging the Trump administration’s tariffs in court, prompting some companies to adopt a more cautious stance.  

Expectations of further rate cuts helped support the markets at the end of the quarter, but the period generally saw a shift to a more selective market with an increased dispersion of returns. 

International equities 

As measured by the MSCI EAFE Index, international developed markets rose 3.4% in Canadian dollars in the fourth quarter. In Europe, the markets advanced modestly, supported by inflation data deemed reassuring despite one-off surprises, especially in Germany. 

The European Central Bank left its monetary policy unchanged, confirming that inflationary pressures remained broadly contained. The industrials and health care sectors contributed positively to the return. 

The Japanese market continued to stand out. Although inflation remained above the 2% target, the Bank of Japan chose not to raise rates. The weak yen supported exporting companies, while higher spending on equipment helped strengthen domestic demand. 

Emerging markets 

Emerging markets advanced 3.2% in the fourth quarter, with returns varying by region. In China, manufacturing activity continued to contract, with the PMI falling in November for the eighth straight month, reflecting continued weakness in new export orders. 

In contrast, the Indian market continued to rise, supported by strong corporate earnings, a favourable monetary environment and foreign capital flows. In Asia, trade developments between the U.S. and China were favourable to some markets, including South Korea and Taiwan, whose semiconductor sectors are closely tied to artificial intelligence. 

More broadly, emerging markets continued to benefit from the U.S. dollar’s weakness since the start of the year, attractive valuations and increased interest from investors seeking diversification.

Outlook 

The end of the fourth quarter leads us to make a number of observations. The global investment environment is increasingly being shaped by a limited number of dominant forces, with artificial intelligence in the forefront. Although AI is a structural driver of economic growth, notably because of the productivity gains it allows, such growth doesn’t automatically guarantee high stock market returns. Financial markets take into account not only future growth but also the growth already priced into valuations. 

Large institutional investors agree that markets are entering a phase calling for selectivity. Short-term expectations for AI may be too optimistic or too high, given that the requisite investments are of an unprecedented scale and time is of the essence. 

In the United States, equities remain the backbone of portfolios, but future returns are expected to be more subdued than in recent years. The country’s 10 largest companies dominate U.S. and global market capitalization, underscoring the importance of sound risk management in an environment of heightened concentration. 

Ten S&P 500 stocks account for nearly 40% of its value¹

High-quality fixed income is becoming attractive again, offering both appealing income and diversification.  

Even so, risks remain: the high valuations of large tech companies, the high level of public debt, geopolitical uncertainties and the crucial matter of the return on AI investments. 

As for Canada, the economy seems to be gradually absorbing the shock of trade tensions with the United States. Although most of the tariff impacts appear to be behind us, growth is expected to remain moderate, with no marked rebound. Canada’s growth potential is expected to be limited in 2026 because of still-fragile business confidence, weaker domestic demand and gradual withdrawal of monetary support.  

The Federal Reserve’s monetary policy path will play a central role in 2026. Investors are expecting further rate cuts, as long as inflation remains contained, especially in an environment where tariff increases could put additional pressure on prices. Moreover, relations between the U.S. and China, as well as other geopolitical tensions, could again become key factors for global markets. In this regard, the recent U.S. intervention in Venezuela illustrates the growing fragmentation of the geopolitical order as well as the increased importance of national security considerations and their potential impact on energy markets, inflation and, indirectly, the outlook for monetary policy. Trump’s intervention in Venezuela and expansionist rhetoric will be a closely watched key issue as the year begins. 

In this environment, discipline, diversification and prudent valuations remain vital for investors.

The fourth quarter of 2025 serves to remind us that financial markets are delicately balanced. Long-term optimism coexists with short-term uncertainties and expectations. Despite the volatility and dispersion of returns, the equity markets generally advanced on the quarter as a whole. 

The temptation to react to short-term fluctuations remains strong, especially in an environment where technological innovation and monetary policy are key market drivers. Even so, experience shows that trying to time entry and exit points often leads to disappointment. 

In this context, maintaining a disciplined, diversified approach aligned with long-term objectives remains essential. More than ever, selectivity, risk management and patience are key elements that can see investors through an investment environment characterized by profound change and geopolitical disruption.