A new report says positive gains for U.S. and Canadian economies as well as financial markets are expected to continue in 2025 despite uncertainty around U.S. policy.
The report was authored by the Edward Jones investment strategy team, which included some key views for 2025 and suggestions for positioning portfolios. The authors said that while the positive momentum from 2024 is poised to continue, economic growth and markets “may cool.” Two of the major themes included a soft landing for Canada and the U.S. as well as a continuation of the bull market, now headed into its third year.
“We expect Canadian and U.S. gross domestic product (GDP) growth to moderate but remain positive, supported by a healthy consumer and resilient labour market. In our view, these solid fundamentals also underpin an ongoing stock market expansion, albeit perhaps with more bouts of volatility and more modest gains ahead,” the report said.
“While we see no signs of a recession or downturn on the horizon, woven into the 2025 narrative are new walls of worry for financial markets to climb. These include uncertainty around new U.S. policy initiatives, including immigration reform and tariffs.”
The report’s authors say they continue to view any volatility in markets as an opportunity for investors to rebalance their portfolio and move to diversify.
Soft landing
Looking ahead in 2025, the report says the Canadian and U.S. economies are likely to benefit form positive momentum as the “soft landing” has prevailed in both nations.
“We expect conditions for Canadian and U.S. households to improve somewhat in the year ahead as the central banks continue to cut rates (albeit perhaps just two to four times more) and inflation continues to moderate and remain contained,” the report said.
“Wage growth should also remain above inflation rates, which means consumers will continue to benefit from positive real wages. While economic growth could cool a bit in the first half of the year, perhaps sub two per cent, we do not expect a downturn or recession.”
However, there is potential for gross domestic product growth to “reaccelerate toward the back half of 2025,” the report said. This could be driven by two main factors, the first being lower central bank policy rates as well as potential pro-growth policies in the U.S. including demetallation and tax cuts.
“These may be offset by uncertainty around tariffs and trade wars, but we see this risk contained more to specific industries and global peers. It should not outweigh the broader pro-growth impulses we may see by year-end 2025,” the report said.
Bull market
According to the report, U.S. large-cap stocks delivered a second consecutive year of gains over 20 per cent last year, marking the first time since 1998. Meanwhile the S&P/TSX Composite Index posted its strongest year since 2009.
“This strength has been underpinned by a resilient consumer, rising corporate profits, and central bank easing, conditions that will likely persist in 2025. Returns are likely to moderate and volatility to pick up, but we think the rise in stocks will continue into its third year,” the report said.
Despite the assertion that the bull market will continue, the report’s authors say the third year “may not be as smooth of a ride,” given policy uncertainty surrounding trade, immigration and tariffs. As a result, earnings growth will have to “do the heavy lifting for market returns instead of valuation expansion.” The report says this may imply slower gains than previous years, but positive growth, nonetheless.
“We expect TSX earnings to accelerate to 10 per cent and S&P 500 profits to grow 10 per cent–15 per cent, with the low end of the range as our base case expectation and the high end as a possibility if policies like corporate tax cuts are delivered,” the report said.
How to position portfolios
Three main strategies were outlined in the report for investors to position their portfolios this year.
The first was to “think strategically” about diversification, noting that a return to a more typical level of volatility is expected this year.
“Appropriate diversification and rebalancing strategies can help keep the focus on your goals as you navigate these periods,” the authors said.
Secondly, the authors recommended investors be overweight on equities and favour U.S. stocks, especially those that performed well last year, which the authors aid are poised to continue momentum in 2025 based on strong fundamentals.
“We expect U.S. stocks to be supported by the relative strength of the domestic economy and broader market leadership, particularly from segments of the market with more room for their valuations to expand,” the report reads.
Lastly, the report recommended investors to “revisit the purpose of cash” in their portfolio and to reduce reinvestment risk where needed.