Daily market snapshot

Thursday, 05/22/2025 p.m.

• Stocks mixed as U.S. tax and spending bill advances – The TSX edged higher while U.S. equity markets closed lower on Thursday following passage of the tax and spending bill in the U.S. House of Representatives.* Consumer discretionary and communication stocks posted the largest gains, while the utility and health care sectors were laggards. Bond yields fell, with the 10-year Government of Canada yield at 3.36% and the 10-year U.S. Treasury yield at 4.54%, in a reversal of their recent trend higher, as the potential for higher budget deficits driven by tax cuts has raised concerns in bond markets. Initial jobless claims fell to 227,000 this past week, below estimates pointing to 230,000*. Continued claims, which measures the number of people receiving benefits, ticked up to 1.9 million, from 1.87 million the prior week*. In international markets, Europe finished lower, as the preliminary S&P Services Purchasing Managers' Index (PMI) for the eurozone dropped to 48.9 in May, slipping into contraction territory and missing estimates for a modest rise to 50.3.* The U.S. dollar advanced against major international currencies. In commodity markets, WTI oil traded lower on potential additional supply hikes from OPEC+*.
   
• U.S. House passes tax and spending bill – The U.S. House of Representatives passed the tax cut and spending bill this morning in a 215-214 vote largely along party lines. The vote follows committee sessions this week to make changes and amendments to address objections and shore up support among Republicans. The bill would permanently extend provisions of the 2017 Tax Cuts and Jobs Act that were set to expire at the end of this year and temporarily raise the deduction for state and local taxes — known as "SALT" — to $40,000 for households with income of up to $500,000 per year and eliminate income taxes on Social Security, overtime pay and tips. To partially offset lower revenue driven by tax cuts, spending cuts will include reductions to renewable-energy incentives, tightened eligibility for health and food aid programs, and Medicaid work requirements, among others. Overall, the Congressional Budget Office forecasts that the bill would add roughly $2.4 trillion to the budget deficit over the next decade, though this figure excludes interest on the additional debt and some interactions of provisions, potentially pushing the impact closer to $3 trillion, which has raised concerns in bond markets. The bill will now advance to the Senate, where it appears likely to face additional revisions. Congress has set a July target for a final bill to be signed into law, which could look very different than the current version. Consequently, we do not recommend taking actions based on the bill in its current form.
   
• Preliminary services and manufacturing indexes rise: The S&P Flash U.S. Services PMI rose to 52.3 for May, beating estimates for 51.5*, as higher prices more than offset the continued drop in exports. Flash manufacturing PMI also increased to 52.3, ahead of forecasts pointing to 50.7*, benefiting from the largest increase in input inventory holdings on record** as companies sought to get ahead of further tariff-related issues, such as potential shortages and price hikes. Overall, these readings are consistent with recent trends of services remaining above the key 50.0 mark reflecting expansion and manufacturing recovering from contraction at the start of the year. Continued, though likely slower, economic growth would be supportive of the healthy labour market and consumer spending, in our view.
   

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **S&P}

• Stocks close lower as bond yields jump – North American equity markets traded lower on Wednesday, as a spike in bond yields weighed on sentiment. A 20-year U.S. Treasury auction was met with weaker demand than expected, adding to the recent move higher in bond yields. The 10-year U.S. Treasury yield climbed roughly 0.1 percentage points to just below the 4.6% mark, while the 30-year Treasury yield rose to 5.08%.* The 10-year GoC yield finished higher as well, rising to 3.38%.* In equity markets, the S&P 500 closed lower by roughly 1.6%, while the TSX posted a decline of 0.7%.* On the policy front, reports have surfaced that the U.S. House of Representatives is making progress on the reconciliation bill, and a vote could come as soon as later today.* Overseas, markets in Europe were flat following a higher-than-expected inflation reading from the U.K., while markets in Asia were mixed overnight.* 
   
• Earnings remain in focus – First-quarter earnings season is winding down, with roughly 94% of companies in the S&P 500 and 91% of companies in the TSX having reported earnings.* Retailers Target, Lowe's and TJX all reported earnings this morning, posting mixed results. Target reported earnings per share and sales that were lower than expected, citing economic uncertainty as part of the reason behind the lackluster results.* Additionally, Target lowered its full-year guidance for earnings and sales growth.* Lowe's and TJX posted stronger results, with both companies slightly exceeding expectations for earnings.* Both Lowe's and TJX maintained full-year guidance.* Today's batch of retail earnings follows Home Depot's results yesterday, where the company reported sales that were better than expected but earnings that were slightly below expectations.* Home Depot management stated it does not plan to raise prices due to tariffs and maintained its full-year guidance. Next up, Canadian bank earnings will be in focus tomorrow, with TD Bank scheduled to report, while U.S. tech earnings will take the spotlight next week, with NVIDIA scheduled to report on May 28.* At an index level, first-quarter results have been strong thus far, with S&P 500 earnings on pace to grow by roughly 13%, up from estimates of roughly 7% at the end of March.* TSX earnings have been strong as well, with earnings on pace to grow by 12% in the first quarter.* While earnings estimates have been revised lower in the quarters ahead, S&P 500 earnings are still expected to post growth of 9% in 2025, while the TSX is expected to see earnings growth of 8%.* With trade tensions easing in recent weeks and healthy economic activity, we believe single-digit earnings growth for the S&P 500 is attainable in 2025.*
   
• Longer-term bond yields rise – Bond yields closed higher again on Wednesday, with the 10-year U.S. Treasury yield just below the 4.6% mark and the 10-year GoC yield at around 3.38%.* After the 10-year GoC yield fell to below 2.9% and the 10-year U.S. Treasury yield fell to roughly 4% in early April, yields have climbed higher over the past month and a half, as trade tensions have eased and economic data has been resilient.* Additionally, yesterday's domestic inflation report showed that measures of core inflation ticked higher in April, sending the 10-year GoC yield higher by 0.12 percentage points yesterday.* Despite the recent rise in bond yields, Canadian investment-grade bonds are roughly flat year-to-date, while U.S. investment-grade bonds were higher by roughly 2% through yesterday's close.* Within Canadian investment-grade bonds, we recommend investors slightly overweight intermediate- and longer-term bonds relative to the Bloomberg Canada Aggregate Index. In our view, intermediate- and longer-term bonds can allow investors to lock in higher yields for longer, as the Bank of Canada likely continues to ease monetary policy, highlighting potential reinvestment risk of short-term bonds and GICs.
   

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks finish mixed following Canadian inflation – The TSX closed modestly higher, while U.S. equity markets closed modestly lower on Tuesday, following Canadian consumer price index (CPI) data. Headline CPI rose by 1.7% annually in April, down from the March reading of 2.3% and the lowest annual gain since September 2024.* On the corporate front, home-improvement retailer Home Depot announced better-than-expected sales for the first quarter but reported earnings that were slightly lower than expected.* However, company management maintained full-year guidance and stated that the company doesn't plan to raise prices in response to tariffs.* Overseas, European markets closed higher following a modest improvement in the eurozone consumer confidence indicator, while Asian markets were mostly higher overnight following China's decision to lower two of its key lending rates by 0.1%.* Bond yields finished higher, with the 10-year GoC yield rising to 3.29% while the 10-year U.S. Treasury yield closed around the 4.5% mark.*
   
• Headline inflation falls to below 2% – Headline CPI rose by 1.7% year-over-year in April, down from a 2.3% rise in March and the lowest annual gain since September of last year.* The decline in headline inflation was driven by lower energy prices, which declined by 12.7% in April following the removal of the consumer carbon tax.** Excluding the impact of lower energy prices, price pressures were more persistent. CPI excluding food and energy rose by 2.6% on an annual basis in April, up from a 2.4% rise in March.* CPI-median and CPI-trim, which are measures of core inflation closely monitored by the Bank of Canada (BoC), told a similar story, with CPI-median posting an annual gain of 3.2% and CPI-trim posting an annual gain of 3.1% in April, both higher than the March readings.** Despite potentially persistent core inflation, we believe the BoC will continue easing policy in 2025 to help offset potentially slowing economic growth. Bond markets are pricing in one more 0.25% rate cut from the BoC in 2025, which we'd view as a reasonable expectation.***
   
• Earnings season winds down, with retailers in focus this week – First-quarter earnings season is winding down, with roughly 93% of companies in the S&P 500 and 92% of companies in the TSX having reported earnings.* This week, consumer spending trends are in focus, with retailers Home Depot, Target, Lowe's, TJX and Ross Stores all scheduled to report, and with investors likely watching to see how company management expects tariffs will impact retail pricing and consumer demand. Home Depot announced results this morning, reporting sales that were better than expected but earnings that were slightly below expectations.* Company management stated it does not plan to raise prices due to tariffs and maintained its full-year guidance.* Next up will be Target, TJX and Lowe's, which will report tomorrow. At an index level, results have been strong thus far, with S&P 500 earnings growth on pace to grow by roughly 13%, up from estimates of roughly 7% at the end of March.* Earnings in the TSX have been strong in the first quarter as well, and are on pace to grow by 12%.* While earnings estimates have been revised lower in the quarters ahead, S&P 500 earnings are still expected to post growth of 9% in 2025, while the TSX is expected to post earnings growth of 8%.* With trade tensions easing in recent weeks and healthy economic activity, we believe single-digit earnings growth is attainable in 2025.*
   

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **Statistics Canada ***Bloomberg}

• Equity markets close little changed following U.S. debt downgrade – U.S. equity markets closed near the flatline on Monday, with markets digesting credit rating agency Moody's decision to downgrade the U.S. long-term issuer and senior unsecured ratings from Aaa to Aa1. Moody's is the third major credit rating agency to downgrade the U.S., following S&P Global (August 2011) and Fitch (August 2023). The S&P 500 and NASDAQ were little changed on Monday, while the Dow closed higher by 0.3%.* Leadership favoured defensive sectors, with health care and consumer staples among the top performers, while growth sectors, such as technology and consumer discretionary along with the commodity-sensitive energy sector, were among the laggards.* Longer-term bond yields opened the day firmly higher, but ticked lower as the day progressed, with the 10-year Treasury yield closing little changed at around the 4.45% mark.* Canadian markets were closed for Victoria Day. 
   

• U.S. loses its last triple-A credit rating – On Friday evening, credit rating agency Moody's downgraded the U.S. long-term issuer and senior unsecured ratings from Aaa to Aa1 and changed the outlook to stable from negative.** Moody's cited an increase in government debt and interest payments to levels that are much higher than similarly rated sovereign issuers as the reason behind the downgrade.** Additionally, Moody's stated that it does not expect current fiscal proposals will result in a meaningful reduction in deficits over the coming years, and expects the U.S. federal deficit to widen over the coming decade.** Moody's did issue a stable outlook for the U.S., suggesting an additional change in the U.S. credit rating is unlikely in the medium-term, citing the U.S. economies large scale, high average incomes, strong productivity growth and the U.S. dollar's status as global reserve currency as reasons for the stable outlook.** Moody's is the third major credit-rating agency to downgrade the U.S., following S&P Global (August 2011) and Fitch (August 2023). 
   

  During the 2011 experience, U.S. Treasury yields actually declined following the S&P Global downgrade, with the 10-year Treasury yield falling from 2.34% on August 11 to 1.72% by mid-September, and ended the year around the 1.9% mark.* The S&P 500 Index traded modestly lower in the month following the downgrade, but rose by 7% from August 11 through year-end.* During the 2023 experience, the 10-year U.S. Treasury yield spiked in the weeks following the downgrade, rising from around 4% to a peak of nearly 5% in October 2023, before ending the year below the 4% mark.* The S&P 500 fell by roughly 10% from August 1, 2023 through mid-October in response to the rise in yields. However, the index rose by 4% from August 1, 2023 through year-end, recouping the October losses.* 
   

  While the Moody's downgrade doesn’t come as a huge surprise, given the prior two downgrades and the previously negative outlook on the U.S. by Moody's, it does highlight that policymakers could be forced to make difficult spending decisions down the road, as the current fiscal path is likely unsustainable over the long-term. For investors, we recommend maintaining a well-diversified portfolio aligned to your goals as opposed to reacting to headlines. As part of our opportunistic asset allocation guidance, we recommend overweighting stocks relative to bonds, with a focus on U.S. stocks. Within investment-grade Canadian bonds, we recommend favouring longer-duration bonds which could help investors lock in higher-rates for longer.
   

   

• Earnings season winds down with retailers in focus this week – First-quarter earnings season is winding down, with roughly 92% of companies in the S&P 500 and the TSX having reported earnings.* This week, consumer spending trends will be in focus, with retailers Home Depot, Target, Lowe's and Ross Stores all scheduled to report, and investors likely watching to see how company management expects tariffs will impact retail pricing and consumer demand. First-quarter results have been strong thus far, with S&P 500 earnings growth on pace to grow by roughly 13%, up from estimates of roughly 7% at the end of March.* Earnings in the TSX have been strong in the first-quarter as well, and are on pace to grow by 12%.* While earnings estimates have been revised lower in the quarters ahead, S&P 500 earnings are still expected to post growth of 9% in 2025 while the TSX is expected to post earnings growth of 8%.* With trade tensions easing in recent weeks and healthy economic activity, we believe single-digit earnings growth is attainable in 2025.*
   

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **Moody's Ratings}

• Stocks rise to close out a strong week – The TSX reached a new record high, while U.S. equity markets also finished higher on Friday, led by health care and utility stocks. U.S. stocks have posted a strong recovery in recent weeks as trade tensions have eased, with the S&P 500 now up 1.3% and U.S. mid-cap stocks up 2.4% year-to-date.* Bond yields were mixed, with the 10-year Government of Canada yield up to 3.17% and the 10-year U.S. Treasury yield down near 4.44%.* In international markets, Asia finished mixed overnight, as Japan's first-quarter GDP missed estimates, contracting from the prior period at a 0.7% annualized pace, the first negative reading in a year.* European markets rose, as Germany's DAX index reached a new record high*. The U.S. dollar advanced against major international currencies. In commodity markets, WTI oil is traded higher as trade tensions ease*.
   
• Housing starts edge higher – U.S. privately owned housing starts in April rose to a seasonally adjusted annual rate of 1.36 million**, just below estimates of about 1.38 million*. Building-permit issuance for residential construction slowed to an annual pace of about 1.41 million, missing forecasts for a smaller decline to 1.45 million*. These readings reflect confidence among homebuilders, in our view, despite the average 30-year fixed mortgage rate remaining elevated at 6.76%**. These trends should help keep shelter price inflation contained as housing supply and demand come into better balance over time, in our view. The shelter component of CPI inflation has cooled but remained elevated at 4.0% year-over-year in April, well above the headline figure of 2.3%.* Many homeowners have mortgages with rates well below market rates, so selling could raise their house payments. Fed rate cuts over the next year could help lower mortgage rates, potentially bringing more existing homes to market.
   
• Consumer sentiment weakens further, driven by higher inflation expectations – The University of Michigan preliminary consumer sentiment index fell for the fifth consecutive month to 50.8, below expectations for a rebound to 54.55 and the lowest reading since 2022. Sentiment was impacted by near-term inflation expectations that rose to 7.3%, from 6.5% the prior month***. Long-term consumer inflation expectations also edged higher to 4.6%, up from 4.4%***. Tariffs were specifically mentioned by nearly 75% of consumers surveyed, providing a key driver of inflation concerns. While tariffs could lead to price hikes over the near term as they are at least partially passed through to consumers, we don't expect the impact to drive higher inflation over the long term. Importantly, consumers continue to spend at a solid pace*, despite weaker sentiment. Some easing of trade tensions could help improve consumer sentiment over the coming months.
   

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **Freddie Mac via FRED ***University of Michigan}