Weekly market wrap

Markets continue to climb walls of worry, supported by solid economic data

Key takeaways:

• Stock markets continued to gradually move higher last week, with the S&P 500 and Canadian TSX both moving up by around 1%. Both indexes are now up over 25% in USD terms since the April 8 lows.

• Markets have been buoyed by positive economic data. Last week, inflation readings in both the U.S. and Canada for June were in line with expectations, Canadian employment surpassed expectations, and corporate earnings growth for the second quarter remains on pace to exceed forecasts thus far.

• Tariffs continue to remain an overhang on markets, with investors in wait-and-see mode ahead of the new August 1 tariff deadline and potential U.S. sector tariffs. However, even as tariff rates have moved substantially higher since the beginning of the year, inflation has remained contained and economic growth has held up in the U.S. and Canada.

• Overall, despite the uncertainty that began earlier this year, markets have been able to climb several walls of worry, supported by solid economic fundamentals. We may see caution and bouts of volatility as investors digest a new set of tariff updates in August and head toward the seasonally choppy September timeframe. Nonetheless, we would expect a more favourable backdrop heading into year-end, as the Fed and Bank of Canada consider cutting rates, and as we have more clarity overall on trade and tariffs.

The markets welcome better economic data: Inflation, employment and earnings

The equity markets continued to grind higher last week, with the S&P 500 and Canadian TSX near all-time highs. 

Financial market returns have been underpinned by a slew of better-than-expected economic readings, which have supported investor sentiment and helped markets to climb walls of worry. This past week we saw the positive economic data continue, including

• U.S. and Canadian CPI inflation data in line with expectations for June, despite tariff increases: U.S. consumer price index (CPI) inflation for June came out in line with expectations last week, with headline CPI up 2.7% year-over-year, a tick higher than forecasts of 2.6% and above last month's 2.4% reading. While prices were higher in some categories, including apparel, appliances, and home furnishing, we also saw lower prices in categories like new and used cars. 
  
  Similarly, Canadian headline CPI data for June was 1.9% year-over-year, in line with forecasts and a tick higher than last month's 1.7% reading¹. In Canada, however, there was an increase in new and used car pricing, in addition to apparel and home furnishings. Nonetheless, Canadian inflation remains contained and in line with the Bank of Canada's 1% to 3% to target range.

• Canada's employment picture remains stable: In Canada, the June labour-market report showed 83,100 jobs added, well above the forecast of no jobs added and higher than last month's 8,800. The unemployment rate also ticked lower to 6.9%, down from 7.0% last month¹. Hiring in the private sector and a slight increase in the participation rate as more Canadians entered the workforce both helped support the labour market; and 

• S&P 500 earnings growth for the second quarter thus far remains on pace to beat expectations: The second-quarter corporate earnings season began in earnest last week, and thus far S&P 500 companies have beaten expectations. About 12% of companies have reported earnings, and of these, 86% have exceeded forecasts, well above the 10-year average of 75%. Among these, financial companies have offered the largest upside surprises thus far¹. We have heard from big banks like J.P. Morgan and Goldman Sachs, which have pointed to higher trading revenues and better-than-expected capital markets activity.
  
  While it is early in earnings season still, keep in mind that the bar was reset lower over the last few months, with second-quarter earnings growth expectations falling from about 11% annually at the start of the year to 5% at the end of June¹. In our view, second-quarter earnings growth is likely to exceed the lowered bar, and full-year earnings are likely to end in the mid- to high-single-digit range. Given the potential for lower interest rates and more clarity around tariffs, we also see a potential re-acceleration of corporate earnings in 2026, with double-digit earnings growth likely.

Are markets ignoring a potential negative catalyst in tariffs? Perhaps not

Tariffs and trade continue to remain a cloud over investors and the markets. The U.S. administration has pushed back its trade deadline to August 1 on most of its global trading partners, creating another source of uncertainty for investors. The U.S. also indicated a new, higher 35% tariff on Canada, effective August 1, although USCMA-compliant goods may be exempt from this rate.

The U.S. administration has also announced a small number of deals, including deals with the U.K. and Vietnam, a framework for trade with China, and ongoing negotiations with countries like Indonesia, India and the European Union. 

Nonetheless, average tariff rates have already moved meaningfully higher on U.S. imports, as the administration has implemented blanket 10% tariffs, with higher tariffs on China and certain sectors like steel and aluminum and autos. This has increased the average tariff in the U.S. from about 2.4% to about 20.6%, the highest since 1910, according to the Yale Budget Lab. This has also resulted in higher tariff revenues collected by the U.S. Treasury, including almost $27 billion in June.

Despite tariff rates rising, however, we have not yet seen a meaningful impact on inflation, or an outsized impact on consumption or the economy. There could be a number of reasons for this, such as

• Higher tariff rates have been absorbed across a number of constituents, including by exporters across the supply chain, by corporations absorbing the higher costs, and some costs being passed to the end consumer; 

• Many companies have likely stockpiled inventories ahead of tariffs, or even at a 10% tariff rate, and thus can continue to sell goods to consumers at steady price levels; and 

• Third, we have also seen oil and energy prices move lower this year, with WTI crude oil largely in the $60 - $70 range, for example, which has also helped support lower prices at the pump for consumers and lower energy costs for companies.

Finally, investors may also be picking up on some positives coming out of ongoing trade negotiations. For example, last week the U.S. administration announced it may be loosening export restrictions, which would allow companies like NVIDIA to sell certain AI semiconductor chips into China once again. And ongoing deals and negotiations with countries like Vietnam and Indonesia should also help secure alternative supply-chain options outside of China. The likely goal of the administration on trade is that, over time, more companies will diversify their supply chains, and more economies will lower their tariff and non-tariff barriers.

Markets can continue to climb walls of worry in the second half of 2025

Overall, U.S. and Canadian stock markets appear to have overcome the peak fear and uncertainty that emerged in early April around the threat of sharply rising tariffs. Since then, we have seen tariff increases get delayed and inflation and economic data remain resilient. 

As we look ahead, we would not expect markets to continue to move in a straight line higher, especially as we head toward the seasonally choppy months of August and September. Markets will also have to digest additional tariff headlines as the August 1 deadline approaches. This may mean new and even higher tariff rates, and we may see corporations and export partners less willing to absorb these higher costs. Thus, prices may rise, and consumption could cool in both the U.S. and Canada in the second half of the year. All these factors could spark bouts of volatility in the weeks ahead.

However, in our view, investors can still feel comfortable that the worst-case scenario – high tariff rates, no positive outcomes from trade negotiations, and runaway inflation – is not likely to play out. In addition, as we look toward the end of the year and into 2026, we would expect prices and inflation to stabilize again and the Fed and Bank of Canada to lower interest rates. 

We thus believe investors can use pullbacks and volatility to position for a more stable backdrop and re-acceleration of growth in the year ahead. We favour U.S. large-cap and mid-cap stocks, and we recommend sectors across growth and value, including consumer discretionary, financials, and health care. Your financial advisor can help ensure your investments are aligned to your unique goals and risk preferences, and help you navigate through the headlines and walls of worry that may lie ahead.

Mona Mahajan
Investment Strategist

^{Source: 1. FactSet}

Weekly market stats

Source: FactSet, 7/18/2025. Bonds represented by the Bloomberg Canada Aggregate Bond Index. Past performance does not guarantee future results. *4-day average ending on Thursday.

The Week Ahead

Important economic releases this week include retail sales for Canada and leading economic indicators and Purchasing Managers' Index (PMI) data for the U.S.