Slowing Growth, Shifting Tides

Beneath the surface of steady headlines, leading economic indicators suggest a slowdown could be in the cards for the global economy. Canadian equities have quietly shown strength, supported by a strengthening in the Canadian dollar, easing inflation at home, shifting trade dynamics, and relatively cheap valuations vs. their US counterparts.

• Economic Momentum

• Currencies In Transition

• Interest Rate Landscape

• Gold’s Defensive Role

• Canada’s Position

• Valuations Matter

Overview

As we move into the second half of 2025, markets are grappling with the lingering effects of policy shifts and elevated interest rates. For Canadian investors, the landscape is mixed: slower momentum abroad, shifting capital flows, and a better-than-feared domestic backdrop. While volatility remains a central theme, recent trends across currencies, bond yields, and equity markets are offering fresh insight into how the economy is evolving. This month’s edition unpacks the signals from global growth data, shifts in demand for safe-haven assets, and the ongoing valuation divergence between Canadian and U.S. equities.

Slower, Not Stalled

Recent business and consumer surveys, as well as several other leading economic indicators suggest global economic momentum is cooling, but actual measures of economic activity look resilient. In the U.S., spending appeared stronger in the second quarter, but much of that strength came from consumers and businesses accelerating their purchases before new tariffs took effect. Elsewhere, a surge in U.S. imports ahead of tariffs likely supported global growth. By buying goods early to avoid future costs, consumers and businesses temporarily boosted demand — a one-time effect that’s unlikely to continue. As it fades, we expect the global economy to lose some of its momentum.

Canada continues to benefit from easing inflation pressures, especially for essentials like food, energy, and interest payments. In the meantime, wage growth remains firm, allowing households to spend on non-essentials. Last, Canadians, precisely the middle class, will be enjoying a 1% tax cut from the Federal government starting on July 1st. Together, these dynamics are helping the Canadian economy to stay resilient despite ongoing policy and macro uncertainties.

Currencies in Transition

In currency markets, pressure is building on the U.S. dollar. Many emerging markets ran large trade surpluses and reinvested part of their U.S. dollar proceeds by buying U.S. financial assets such as U.S. government bonds or stocks over the past several years. As a result of a potential reduction in exports to the U.S., emerging markets are expected to buy less U.S. dollar-denominated assets. This shift in buying behavior changes how money moves around the world. At the margin, with less capital flowing into U.S. assets, global demand for the U.S. dollar may weaken—potentially affecting cross currency rates in the months ahead. In the past, similar slowdowns in global demand for U.S. dollars have helped the Canadian dollar gain strength.

Shifting Interest Rate Landscape

Interest rates are still high, even though the economy is slowing. Central banks remain cautious, worried that inflation isn’t fully under control at a time when labour markets look resilient. Notably, the U.S. Federal Reserve appears hesitant to cut rates too soon but given current interest rate levels and global tariffs starting to drag on growth, there are signs the market is adjusting. We believe a “bull steepening” of the bond yield curve could be in the cards whereby short-term rates eventually fall faster than long-term rates; a classic signal that investors expect growth to slow and rate cuts to follow.

“There are signs the market is adjusting.”

Gold’s Defensive Role Remains Intact

Gold has retreated from recent highs but remains in focus as the broader environment remains uncertain. Historically, periods of decelerating growth, dollar weakness, sticky inflation and/or global uncertainty have often supported demand for gold. As we enter Q3, investors are watching closely to see whether recent price action reflects consolidation, or early signals of renewed momentum.

Canada: Standing Firm

Trade tensions have shifted global export flows, Canada’s sector mix is playing to its advantage, and valuations remain near long-term averages. We continue to believe Canada is well-positioned, especially if the U.S. eventually removes tariffs related to fentanyl and border issues. Otherwise, the shift in global trade flows could open opportunities for Canadian companies to diversify their export markets outside the U.S.

Valuations Still Matter

While U.S. markets are back trading near their 2025 highs, the equity risk premium (premium paid by investors to hold equities over bonds) has nearly disappeared. That means investors are taking on equity risk without enjoying a margin of safety to take on said risk. If bond yields stay around current levels and earnings expectations weaken, further repricing in U.S. markets can’t be ruled out.

“The shift in global trade flows could open opportunities for Canadian companies.”

By contrast, Canadian equities continue to look far more attractively valued vs. historical averages and bond yields. Also, the valuation gap between U.S. and Canadian equities remains unusually wide. After a +10% correction earlier this year, the S&P/TSX recently hit a new all-time high. Historically, when that happens, the index tends to climb another ~5% over the following 6–8 weeks. If a slowdown is avoided, the potential for additional upside remains, but not if a severe recession hits. That said, we note that past performance does not predict future results.

The good news is today’s corporate and household balance sheets in the U.S. are in strong shape. Many of the major investment themes—like AI—are being financed through cash flow, not debt, which is a key difference from 2000 

(corporate debt) and 2008 (household debt), where leverage was a major source of vulnerability. While markets aren’t without risk, we do not see major imbalances likely to trigger a prolonged economic downturn. For long-term investors, more attractive valuations and a resilient fundamental backdrop despite tariffs, suggest a more balanced opportunity set heading into the second half of the year for Canadian equities.

Conclusion: Adjusting to a New Normal

June brings further confirmation that markets are entering a new regime—less dominated by U.S. leadership, and more influenced by policy, valuation, and region-specific fundamentals. With global growth cooling and capital flows in flux, the focus has turned to resilience: where it exists, what’s driving it, and how long it may last.

Canadian assets are showing notable stability in the face of global headwinds, while bonds and gold could provide portfolio diversification opportunities given current policy and macroeconomic risks. Currency trends and trade realignments are also evolving in ways that could reshape return patterns moving forward.

As always, continued monitoring of policy developments, economic signals, and global capital trends will remain central in navigating what comes next.