Insights and Strategies
Our 2024 Recap and 2025 Outlook
Highlights of 2024
- In Canada, we saw an economy continuing to weaken, with average annual real GDP growth of approximately 1.2% in 2024, down from 1.5% in 2023. However, the good news is that consumer spending seems to have picked up in 4Q24. Inflation cooled down from 3.4% at the end of 2023, to just under the 2.0% target, with core measures still above 2.5%, but within the 1-3% control band, and the BoC started easing its policy rate in June to end the year at 3.25% after holding at 5.00% for just under 11 months.
- In the U.S., the economy remained remarkably strong, with the estimated real GDP up 2.8% in 2024, after a 2.9% gain in 2023. Inflation cooled down more slowly, from 3.4% at the end of 2023 to 2.7%. The Fed also slowed from its first big cut in September, to end the year at 4.5%, after 14 months at 5.5%.
- Both Canadian and U.S. equity markets were strong in 2024, up 21.7% and 25.0%, respectively. The Magnificent 7 stocks and A.I. enthusiasm continued to carry the U.S. market. The TSX performance was more broad with Technology, Financials, Energy, and Materials all gaining over 20%.
Macro Forecasts for 2025
- Canadian interest rates are likely to continue declining to the 2.25% level by mid-2025, amid a still weak economy, although the lower rates should also start to show up in better GDP growth through 2025, with consensus expectations for over 2% growth this year. Continuing uncertainty of U.S. tariffs having potentially profound negative impacts on the Canadian economy remains the wild card.
- U.S. policy interest rates are likely to decline only a little more in 2025, to 4.0%, as we expect economic growth to slow only slightly to 2.4%, as inflation remains sticky above the 2% target (2.7% headline, 3.3% core), with mild softness in the labour markets.
- A widening spread in policy rates and contrasting economic outlooks, with overhanging risks of tariffs, likely puts continuing pressure on the Canadian dollar against the U.S. dollar.
Market Forecasts for 2025
- Our overarching expectations are for equity markets to move higher in 2025, on the back of the economic and corporate profit backdrop, but with more muted gains than the 20%+ returns of the last couple of years. Also expect heightened volatility, which could include multiple pullbacks along the way. Our (U.S. Investment Strategy Group’s) S&P 500 target to the end of 2025 is 6,375 using 23.5x EPS of US$270, with a preference for Technology, Industrials, and Health Care. For the TSX Composite, we forecast 26,300 by year-end for an 8.5% total return.
- Rotation is likely to be a major theme in 2025 as stocks (including small and mid-caps) that were left behind during the Magnificent 7 run, but with now positive earnings growth, gain more investor attention. We do not see investors fleeing the Magnificent 7, but we expect the benefits of A.I. to broaden out to (smaller) companies that can monetize those technology opportunities and benefits.
- The U.S. equity markets likely remain the most attractive option geographically due to the strong economy and relative insulation from tariffs. Canadian markets could swing wildly as the reality of tariffs take hold, or as Canada strikes a longer-term trade agreement, potentially under a renegotiated USMCA. Additionally, the performance of Canadian markets can be closely tied to commodity prices, such as crude oil and gold. Other international markets look generally weaker over the next 12 months, especially with the unpredictability of trade war impacts, although low expectations currently could provide opportunities for select regions to outperform.
