Financial Letter - Third quarter 2025

The third quarter of 2025 highlighted the financial markets’ ability to advance despite an environment fraught with economic and political uncertainty. Investors were presented with a mix of positive and negative factors: solid corporate earnings and confirmed monetary easing but also persistent trade tensions and concerns over a U.S. government shutdown.  

Equity markets rose to new all-time highs in July, buoyed by the vibrant technology sector and stable monetary policy. Optimism persisted in August, fuelled by the prospect of a rate cut and continued risk-on sentiment, although Canada-U.S. trade tensions hovered in the background. Finally, September brought the Federal Reserve’s first rate cut in nine months, which boosted market enthusiasm. Even so, the imminent threat of a U.S. government shutdown cast a shadow at the end of the quarter, raising concerns that it would delay the release of key economic data and complicate the Fed’s task. 

Despite this mixed backdrop, global equity markets turned in noteworthy performances. Canada’s S&P/TSX Index advanced 12.5% on the quarter. In the United States, the S&P 500 Index rose 10.3% in Canadian dollars (8.1% in local currency). International developed market equities, as measured by the MSCI EAFE Index, were up 6.9% in Canadian dollars (5.4% in local currencies). Finally, emerging markets outperformed with a 13.1% return in Canadian dollars (12.5% in local currencies). 

Bond markets reflected central bank decisions and expectations of an economic slowdown. North American bond yields fell in September, providing some support for fixed income. Even so, persistent volatility, exacerbated by debates on the sustainability of U.S. debt and political tensions in Washington, reminded us that the current equilibrium is fragile. 

  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 third quarter, the Canadian bond market moved in response to mixed economic pressures. The Bank of Canada maintained a cautious approach in July and August, before lowering its key rate by 25 basis points to 2.50% in September. Its decision was based on moderate inflation, reported at 1.9% in August, and clear economic weakening. 

The Canadian economy’s second-quarter contraction, on declining exports related to new U.S. tariffs, had already affected the economic climate. At the same time, business investment continued to be lacklustre, weighing on the growth outlook. 

The 10-year Government of Canada bond yield, which had risen in July, ended the quarter lower. From 3.28% at the end of the second quarter, it touched a high of 3.6% during the third but ultimately closed the quarter at 3.17%.  

U.S. fixed income 

In the United States, bonds fluctuated considerably during the quarter. After a summer dominated by expectations of monetary easing, the Federal Reserve finally cut its key rate by 25 basis points in September, the first reduction in nine months. The decision caused bond yields to decline, which supported the bond market because the price of outstanding bonds rises when interest rates fall. 

Even so, the end of the quarter was overshadowed by the threat of a federal government shutdown, scheduled for October 1 in the absence of a budget agreement. This prospect added an additional element of uncertainty. Apart from the direct impact on government spending, it also threatened the regular release of economic data, such as the monthly jobs report, on which the Fed relies heavily to set policy. The possibility that these indicators would not be available represented a risk for monetary policy planning.

U.S. government shutdown

The United States has officially entered a budget shutdown. Such a shutdown suspends government services deemed non-essential, furloughs hundreds of thousands of public servants, and delays the release of crucial economic data, such as employment and inflation figures. In contrast to a debt-ceiling crisis, the Treasury’s ability to honour its obligations is not affected. The direct impact on financial markets is expected to be limited in the short term, but a prolonged shutdown or a hardline stance could increase risks and reduce visibility for the Fed.

Budget shutdowns since 1980

Source: History, Art & Archives – U.S. House of Representatives¹

As at September 30, the U.S. 10-year Treasury yield stood at 4.16%, down from 4.24% at the end of June. This period saw investors take a renewed interest in quality assets, in an environment where political fears briefly dominated economic expectations.

Canadian equities 

The S&P/TSX Composite Index recorded a quarterly gain of 12.5%, a robust performance that placed the Canadian market among the world’s top performers. 

Several factors contributed to the advance. The technology sector turned in a strong performance on investors’ continued interest in companies with exposure to new technologies and artificial intelligence. The sharp rise in the price of gold in September buoyed the gold sector, which acted as a performance driver and a safe haven. Finally, Canada’s big banks posted solid results, strengthening investor confidence in the financial sector’s resilience. 

U.S. equities 

Despite political and fiscal uncertainty, the U.S. market ended the quarter on a solid note. The S&P 500 Index returned 10.3% in Canadian dollars and 8.1% in local currency. U.S. equities were lifted by the continued performance of big tech, whose revenues benefitted from the rise of artificial intelligence and strong demand in the digital sector. 

Among the leaders, Google (GOOGL.O) soared nearly 40% on the quarter, and Nvidia (NVDA.O), the driving force behind the artificial intelligence revolution, became the first company in the world to achieve a $4-trillion market capitalization. These advances illustrate the growing dominance of mega-cap technology companies in the U.S. stock market and their central role in the performance of the S&P 500 Index. 

International equities 

The MSCI EAFE Index, which comprises developed markets outside North America, rose 6.9% in Canadian dollars and 5.4% in local currencies. 

In Europe, the markets’ advance took place amid economic surprises that were mixed but generally tolerated by investors. In September, Germany’s unexpected uptick in inflation served as a reminder of continuing pressures despite the end of the European Central Bank’s tightening cycle. Even so, European equities recorded a third consecutive month of gains, propelled by the industrials and health care sectors. 

The United Kingdom also contributed, with its stock market reaching an all-time high thanks to a weaker pound, which is favourable to exporting and multinational companies. In Japan, the central bank maintained its ultra-accommodative policy while hinting at the possibility of an adjustment. That being said, the strengthening of the yen in September tempered the outlook for exporting companies. 

Emerging markets 

Emerging markets outperformed developed markets in the third quarter with a gain of 13.1% in Canadian dollars and 12.5% in local currencies. 

Their remarkable performance was due to several factors. In China, although the manufacturing PMI remained in contraction territory, expectations of a new economic stimulus package supported investor sentiment. The weakening of the U.S. dollar also increased the relative attractiveness of emerging market assets. 

India’s markets continued to rise, supported by foreign capital inflows and solid growth prospects. In Latin America, commodity exporters benefitted from a strong performance by natural resource assets. More broadly, investors have been looking to emerging markets for diversification and more attractive valuations. 

Outlook and risks  

At the end of the quarter, several lessons emerged. The strength of the equity markets is a testament to investors’ resilience in a complex environment, but it rests on a fragile balance. 

 The main sources of uncertainty persist: 

• Ongoing trade tensions between the U.S. and its partners, including Canada;  
• Rising inflation, particularly in Europe and North America;  
• Political risks in the United States, including the government shutdown and its impact on monetary policy and the release of economic data; and  
• The ability of emerging markets to maintain their growth in a still-unstable global environment. 

In this context, bond markets will remain sensitive to central bank decisions and economic signals. As for equities, confidence depends partly on the continued resilience of corporate earnings. 

The third quarter of 2025 served once again a reminder of the difficulty of forecasting market movements. Who would have thought, amid trade tensions and U.S. political uncertainty, that stock market indexes would reach new all-time highs at the end of the period? 

There is always a strong temptation to react to negative news; but experience shows us that panicking or trying to time the market often leads to losses or, at the very least, a loss of gains. Rapid, unexpected rebounds often occur after periods of turbulence. 

In this context, it’s essential to maintain a disciplined investment plan based on long-term objectives. Taking a patient approach, controlling your emotions and diversifying your investments are still the best ways to get through periods of uncertainty. More than ever, in a world where the unexpected is a constant, staying true to a structured strategy is the key to achieving your financial goals.