Q3 PIMG Commentary: Market Strength Amid Economic Weakness

10.08.25

Over the past few months, North American equity markets have shown resilience amid mixed economic signals. In Canada, the S&P/TSX Composite Index posted modest gains, buoyed by strength in energy and financials, while technology lagged. South of the border, the S&P 500 and Nasdaq continued their upward trajectory, supported by robust earnings from mega-cap tech firms and a stabilizing interest rate environment. Volatility declined as investor sentiment improved, though geopolitical tensions and policy uncertainty remain key risks heading into the fourth quarter.

Economic indicators have painted a nuanced picture. In Canada, inflation edged down to 2.8% year-over-year, nearing the Bank of Canada’s target range, while unemployment ticked up slightly to 7.1%, reflecting a cooling labour market. In the U.S., inflation remained sticky at 3.4%, while core CPI showed persistent strength. The U.S. unemployment rate rose slightly to 4.2%, suggesting continued labour market tightness. Central banks in both countries maintained a cautious tone, emphasizing data dependency in future rate decisions.

Market risks intensified in Q3 due to a new wave of U.S. tariffs announced in late September, set to take effect October 1. These include a 100% tariff on branded pharmaceuticals, 25% on heavy trucks, and up to 50% on furniture and cabinetry. The average U.S. tariff rate now stands at 17.4%, the highest in nearly a century. These protectionist measures have triggered inflationary pressures, disrupted supply chains, and created uncertainty across global markets. Canada responded by lifting most retaliatory tariffs on U.S. goods, except for steel, aluminum, and autos. The uncertainty surrounding trade policy has led to increased volatility in currency markets and a slowdown in cross-border investment. U.S. consumption is expected to weaken and global growth risks are rising, as companies pass on higher costs to consumers. One has to wonder how much of the surprisingly resilient economic data and corporate growth has been in relation to the pulling forward of purchases to avoid tariffs that continue to be pushed down the road.

Mark Carney’s first 100 days as Prime Minister have been marked by a pragmatic approach to fiscal and economic policy. His administration has prioritized growing the economy, housing affordability, and productivity enhancement. Markets responded positively to his measured tone and collaborative stance with the Bank of Canada, which has helped stabilize investor confidence. We view the efforts to eliminate the carbon tax, push through major infrastructure projects, and reduce interprovincial trade barriers as beneficial for Canada’s growth prospects. We remain concerned about Federal debt levels and the growing deficit, as these will continue to weigh on tax policy and fiscal flexibility for years to come. Hopefully, foreign investment will return under Carney’s administration and Canada can get back to enjoying a GDP/Capita that rivals the U.S. and other developed countries.

Valuations across major indices remain elevated but not excessive. The S&P 500 trades at approximately 19x forward earnings, slightly above its 10-year average, driven by strength in AI-related sectors and consumer discretionary. Canadian equities are more reasonably priced, with the TSX trading around 14x forward earnings. Bond yields have stabilized, offering more attractive income opportunities, while credit spreads remain tight. Overall, valuations suggest a cautiously optimistic outlook, though selectivity is key.

Over the quarter, we added Nike and Estée Lauder to client accounts with U.S. allocations. We believe these both present compelling long-term opportunities. Nike continues to benefit from strong brand equity, innovation in performance wear, and a growing direct-to-consumer channel. Despite near-term margin pressures, its global footprint and digital strategy support sustained growth. Estée Lauder, meanwhile, is rebounding from supply chain disruptions and weakness in China. Its premium positioning, diversified portfolio, and strength in skincare make it well-positioned for recovery and long-term value creation. Both companies offer attractive entry points for growth-oriented portfolios.

On the sell side, we reduced our weighting in the U.S. technology sector and Canadian banking, which have both been very strong performers from the April lows. U.S. tech companies continue to invest heavily in the AI buildout, although the return on investment remains unclear. While we have retained positions in many of these tech leaders, we felt it was warranted to take some profits as valuations continue to be stretched and we see better value elsewhere. Canadian banks have also performed admirably this year. Some of this performance is from better-performing loan numbers, and less credit losses than feared, while some of this performance is from multiple expansion, i.e., the companies are trading at more expensive multiples. We question if this multiple expansion is warranted, given the declining economic numbers noted above and believed it was a good time to take some profits. Cash positions in client portfolios at quarter-end are notably elevated, as we remain somewhat cautious and patient for better entry points.

In summary, the past quarter has seen steady market performance amid evolving macroeconomic conditions. Inflation and employment data suggest a gradual normalization, while political leadership in Canada has added a layer of stability. However, recent volatility tied to tariffs, central bank independence, and geopolitical tensions underscores the need for caution. Valuations remain reasonable, and selective opportunities—such as Nike and Estée Lauder—offer attractive upside. As we move into Q4, investors should remain constructive but risk-aware, focusing on quality, diversification, and long-term fundamentals.

Your Plena Wealth Advisory Team

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