Global Index Performance

 

 

Fixed Income*

The Bank of Canada (BOC) held its benchmark rate steady at 2.75% following its June 4th meeting, as widely expected, with most economists still forecasting at least two rate cuts later in 2025. Policymakers appear poised to proceed cautiously, awaiting clearer data on economic growth, inflation, and trade before making further moves. Although first-quarter GDP grew at a 2.2% annualized pace, much of that strength was attributed to businesses front-loading activity ahead of tariff deadlines, masking underlying weakness in domestic demand. This raises concerns about a potential slowdown in the second quarter. Inflationary pressures are building amid tariff-related headwinds, and the BOC now faces a delicate balancing act of supporting growth without jeopardizing its inflation mandate. The Canadian dollar briefly touched an eight-month high following the rate pause, supported by stable headline inflation, helped in part by the carbon tax cut, but also pressured by tariff concerns and rising commodity prices. Analysts remain divided due to mixed economic signals, but many expect enough softness by the July 30 meeting to justify the next rate cut.

The Federal Reserve (Fed) held rates steady at 4.25%–4.50% in May, citing persistent inflation concerns and uncertainty tied to new trade policies. Markets are pricing in roughly 50 bps of rate cuts by year end, though forecasts remain split given resilient economic data and diverging views on labor market risks. While April marked a third straight month of cooler inflation, bringing the headline Consumer Price Index to its lowest level since February 2021, Fed officials remain cautious, emphasizing that tariff-related pressures could delay further easing.

Equities*

The Canadian equity market showed strong resilience in May, with the S&P/TSX Composite Index rallying sharply from April lows, supported by robust gains in gold and metals amid global uncertainties. However, the outlook remains cautious amid rising U.S. tariffs on key Canadian exports, such as steel, aluminum, and autos, combined with a recent increase in the unemployment rate to 6.9%. While economists foresee slower growth and potential earnings pressure through the remainder of 2025, dividend-paying and defensive sectors are gaining investor attention. The Bank of Canada’s cautious rate-hold stance aims to balance inflation control with growth support, but trade tensions and economic softness suggest a measured market recovery, with stronger upside potential expected in 2026 as clarity improves.

U.S. equities posted a strong rebound in May, with the S&P 500 Index climbing over 6%—its best May performance since 1997—driven by robust Q1 earnings, resilient consumer data, and a 90-day pause on new tariffs that eased trade-related concerns. The market’s rally was further fueled by strong showings from AI names like Microsoft, Meta, and Nvidia, alongside improving sentiment around productivity gains tied to artificial intelligence. Despite this strength, major indices remain volatile, reflecting a market navigating slowing economic growth, elevated inflation expectations, and lingering policy uncertainty. The OECD’s downgraded global and U.S. growth forecasts underscore the headwinds from rising trade barriers. Strategists note that the market is trading at an estimated 8% discount to fair value, with investors favoring value and core sectors such as energy.

International equities held strong in May, supported by easing trade tensions and renewed fiscal stimulus across Europe. The MSCI EAFE Index posted a modest monthly gain, supported by strength in energy and infrastructure sectors after the U.S. delayed tariffs on European imports. Emerging markets also saw modest gains, led by China, where fiscal support and tech sector strength lifted sentiment.

Outlook and Market Trends

Recent easing of U.S.-China and U.S.-EU trade tensions, marked by tariff rollbacks and a delayed 50% tariff on EU imports, has provided temporary relief to markets, but the outlook remains fragile. Diplomatic channels between Washington, Beijing, and Brussels remain strained, and the risk of renewed tariffs or retaliatory measures continues to cast a shadow over global trade. This uncertain environment favors defensive sectors such as financials, utilities, and healthcare, while technology offers some stability. Conversely, consumer and industrial sectors remain vulnerable to ongoing trade-related headwinds.

Compounding these concerns, fiscal developments in the U.S. have triggered a widespread “sell America” narrative, pressuring dollar-denominated assets amid growing anxiety over a sweeping tax-and-spending proposal, the so-called “One, Big, Beautiful Bill.” Recently passed by the House of Representatives, the bill would add an estimated $3.8 trillion to the U.S. federal debt over the next decade and carries potentially serious implications for Canadian investors. If enacted without changes by the Senate, it would significantly raise U.S. withholding tax rates on Canadian-held assets, including interest, dividends, and real estate gains, with some rates increasing annually up to 50%. Even tax-exempt Canadian pension funds could be affected. While Canada is not directly targeted, its inclusion stems from its Digital Services Tax and broader international tax reform involvement. The legislation could upend decades of favorable cross-border tax treatment, creating added complexity and cost for Canadian individuals, corporations, and institutional investors with U.S.-sourced income. Broader macroeconomic consequences might include reduced foreign investment in the U.S., elevated interest rates, and downward pressure on U.S. asset prices. Though the bill’s fate remains uncertain, pending Senate approval and potential amendments, investors should stay vigilant and consider proactively reviewing their portfolio exposure and tax implications as developments unfold.

Fiduciary Trust Canada’s Investment Committee made the decision to allocate a small weight of the portfolio from cash to Canadian fixed income, considering the current yield environment and the potential for bonds to act as a hedge against equity volatility. We continue to monitor trade negotiations and economic indicators closely, and will reevaluate our positioning, particularly to equities, as needed.

*Data sourced from FactSet as of June 4, 2025.

 

 

 

1. As measured by the FTSE Canada Bond Universe Index
2. As measured by the S&P/TSX Composite Total Return Index
3. As measured by the S&P 500 Total Return Index in CAD
4. As measured by the MSCI EAFE Total Return Index in CAD
5. As measured by the MSCI EM Total Return Index in CAD