Financial Letter - Second quarter 2025

The second quarter offered a perfect illustration of the markets’ sensitivity to the unexpected. In a context of trade tensions exacerbated by unpredictable political decisions, escalating geopolitical conflicts and economic reversals, each piece of news, whether conveyed in a social media post or at a press conference, caused big swings in global stock and bond markets.

Panic gripped the markets early in April, when the Trump administration’s announcement of new “universal” tariffs caused the worst selloffs since 2020. The shock was short-lived, however. Most of the tariffs were quickly put on hold, triggering a spectacular stock market rally in the second week of April.

Buoyed by this momentum, equity markets continued to advance in May, galvanized by the prospect of new trade deals, strong corporate earnings, especially from tech companies, and hopes of rate cuts by the U.S. Federal Reserve (Fed). Enthusiasm for artificial intelligence (AI) also saw a resurgence.

Even so, new swings occurred again in June. Escalation of the conflict between Iran and Israel caused oil prices to surge by more than 20% in mere days only to decline at the end of the month, signalling widespread nervousness in the face of geopolitical developments. 

After this rollercoaster ride, the world’s main equity indexes ended the quarter in positive territory. Some, such as the S&P 500 Index, even returned to their all-time highs. 

In contrast, bond markets remained under pressure, caught between concerns about a new rise in inflation and central bank cautiousness.

  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

In the second quarter, the Canadian bond market returned -0.6%, as measured by the FTSE Canada Universe Bond Index. It was a modest decline, but one that concealed a great deal of nervousness.

The Canadian bond market encountered an especially complex environment during the quarter. Although inflation in Canada was 1.7% in May on an annual basis according to Statistics Canada, persistent core inflation dampened hopes of immediate monetary easing. But, at the same time, the risk of a sharper economic slowdown continued to loom over the country, with the unemployment rate reaching 7.0% in May.

The Bank of Canada responded cautiously to these contradictory signals, leaving its key rate unchanged at 2.75% to preserve its leeway. An additional factor is the significant influence of U.S. rates; the volatility of U.S. interest rates affects Canadian rates because the two markets are highly correlated.

In the United States, after the April tariff shock, investors initially took refuge in bonds amid fears of a recession, causing the 10-year U.S. Treasury yield to fall. But in May the yield started to rise again, driven by Moody’s downgrade of the country’s credit rating, growing concerns about the U.S. budget deficit and the prospect of massive new spending under the One Big Beautiful Bill. The 30-year U.S. Treasury yield even rose briefly above 5% to its highest level since 2007. 

But why do we track the behaviour of 10-year and 30-year U.S. Treasury yields?

Because they act as barometers of the economy. The 10-year yield reflects growth and inflation expectations over the medium term. A sharp decline often indicates concern about an economic slowdown or a recession, whereas an increase signals concern about inflation, an overheating economy or the health of public finances. The 30-year yield, however, is more sensitive to structural trends in the economy. It gives a longer-term view and therefore reacts more to expectations about the sustainability of public debt and the risk of prolonged inflation. 

Outlook

In the coming months, caution will be the order of the day in the Canadian bond market. Multiple sources of uncertainty remain: the continuing trade negotiations between the United States and its partners, geopolitical tensions in the Middle East and economic indicators that will continue to affect interest rate expectations.

Generally speaking, the market expects the U.S. Federal Reserve to start cutting its key rate in the second half of the year, provided that the U.S. economy shows signs of slowing and the inflationary effect of tariffs remains limited. If this rate cut materializes, it could give some support to the Canadian bond market, which is highly correlated with the U.S. market.

Finally, even though we have painful memories of 2022, when stocks and bonds fell simultaneously, we should bear in mind that bonds play an essential role in portfolios. They continue to be a valuable source of income and, above all, a diversification tool capable of providing stability in times of stock market turbulence. In an environment where shocks can occur at any time, this protective function is more relevant than ever.

 Canadian equities

The S&P/TSX Composite Index gained 8.5% in the second quarter. After a chaotic start to April in the wake of the U.S. tariff announcements, the Canadian market quickly recovered.

Its resilience was due to several factors. First, Canada remained largely spared from the new tariffs, thanks to the Canada-United States-Mexico Agreement (CUSMA), which preserved its access to the U.S. market. Second, strength in the financials, information technology and materials sectors helped the index rebound. Oil-price volatility didn’t benefit the energy sector significantly during the quarter. 

That being said, the local economic context remains fragile. Rising unemployment and housing-cost pressures are weighing on spending. The short-term outlook remains uncertain.

U.S. equities

The story of the U.S. market in the second quarter is one of panic versus euphoria. After the announcement in early April of a 10% universal tariff on all imports into the United States, the S&P 500 Index plummeted, coming close to a 20% decline from its all-time high, a threshold often seen as signalling a bear market or increased pessimism about the economic outlook. 

Yet, as shown by the chart below, the index rebounded after the White House declared a 90-day moratorium on most tariffs. The signing of a temporary trade agreement with China then amplified the upswing. 

But the quarter was also marked by escalating tensions in the Middle East. Although this crisis caused temporary nervousness, it was not enough to prevent the stock market from rebounding.

As a result, the S&P 500 recovered all its spring losses and even reached new highs in June, ending the quarter up 10.9% in U.S. dollar terms.

Expressed in Canadian dollars, however, the return was 5.2%. The difference is due to depreciation of the U.S. dollar relative to the Canadian dollar. When the greenback declines, gains made in the U.S. are worth less when converted into Canadian dollars, reducing returns for Canadian investors. Conversely, if the U.S. dollar appreciates, it can amplify gains when they are translated into Canadian dollars.

International and emerging equities

International and emerging market equities also performed well in the second quarter. The MSCI EAFE Index, which comprises developed markets outside North America, rose 6.3% in Canadian currency. Europe’s performance was driven mainly by Germany and its promises of massive investments in defence and security-related infrastructure. In Japan, the central bank’s ultra-accommodative monetary policy continued to support the market. Strong results from exporting companies also contributed to the return, fuelled by orders received before the new tariffs took effect.

Emerging markets returned 6.4% in Canadian dollars, as measured by the MSCI Emerging Markets Index, despite a mixed performance. China, on the front line in the tariff war, was initially excluded from the 90-day moratorium announced by Trump and faced tariffs of up to 145%. Economic indicators were affected, as export orders fell and growth prospects were revised downward. That being said, countries such as Taiwan and South Korea benefitted greatly from the renewed enthusiasm for artificial intelligence and the tariff truce, which boosted their semiconductor giants. 

Equity market outlook and risks

Although the end of the quarter was calmer than the beginning, the outlook remains fraught with uncertainty. Trade tensions, geopolitical developments and escalating conflicts, as well as the trajectory of monetary policies around the world, will continue to set the tone of the markets. More than ever, the next few months will see persistent volatility calling for vigilance, in a context where every piece of news, whether economic or political, seems capable of provoking extreme reactions.

The second quarter reminded us of an essential lesson: It is extremely difficult, if not impossible, to time the market. Who could have predicted, after the panic of April 4, that the S&P 500 would reach new highs by the end of the quarter?

Giving in to emotion or trying to get out of the market and then get back in often leads to losses or, at the very least, missed opportunities. Investors risk forgoing the rebound that frequently occurs after sharp declines, or crystallizing losses with panic selling.

It’s essential to have an investment plan and stick to it. Exercising patience, staying calm and maintaining a long-term vision are all valuable tools to get you through turbulent times. In an environment where the unexpected has become the norm, diversification and active management are also crucial. 

More than ever, staying disciplined and aligned with your long-term goals is the key to achieving financial independence. Also keep in mind that consulting your advisor can help you take a step back and stay focused on your goals, even when the markets seem unpredictable.