This year has been marked by global uncertainty surrounding trade policy and geopolitical conflicts. Financial markets, however, have been remarkably resilient against this destabilizing backdrop. The broad equity indices have recovered from the sharp pullback in April, volatility as measured by the CBOE Volatility Index (VIX) has retrenched, and high yield credit spreads have receded to near historical lows.
While there continues to be a high degree of macroeconomic and policy uncertainty, the price gains since President Trump’s Liberation Day implies a manageable outcome from tariffs between the United States and its trading partners. Corporate profit growth from the S&P500 companies has been revised down from the start of the year but is still expected to remain positive at 8.4% in 2025.
The fallout of the recent events in the Middle East has been muted so far, and the reaction from financial markets reflect optimism that the conflict is on a de-escalatory trajectory. Oil prices initially spiked up but quickly tumbled to pre-crisis levels following the announcement of the Israel-Iran ceasefire.
Central banks in both Canada and the United States have adopted a wait-and-see approach, choosing to monitor how tariffs will ultimately affect inflation before making further policy decisions. Labour market conditions in the U.S. remain solid with the unemployment rate holding steady at 4.2%. In contract, the Canadian unemployment rate has been rising, hitting 7.0% in May. While trade diversification is a welcome development, a new trade deal with the United States is a crucial step towards supporting the health of export-oriented businesses.
Uncertainty has defined this past year and is expected to persist. Staying focused on the long-term and holding a well-diversified portfolio consisting of financially strong, industry leading companies can provide stability amid unforeseen developments.
