Weekly market wrap

Markets are back at all-time highs: Three factors driving the summer rally

Key takeaways:

• Stock markets made all-time highs last week despite faltering at the end of the week due to headlines around tariffs and trade. The S&P 500 is now up about 5% this year, while the Canadian TSX is up about 8%.
• What is driving this market rally? We highlight three key factors: An easing of geopolitical tensions (and subsequent lower oil prices), a Fed and Bank of Canada that continue to signal lower interest rates are likely (albeit gradually), and the outsized rally in the U.S. mega-cap technology sector.
• While momentum is likely on investors' side in the near term, there are key catalysts in the weeks ahead that markets will have to digest. These include tariff and trade updates, the ongoing debate on a U.S. tax bill, and potentially softer economic data in the quarter ahead. Markets may experience more bouts of volatility, but we believe the fundamental backdrop for equities remains intact, and pullbacks can be used as opportunities.

Three drivers of the summer rally

The summer months are here, school is out, and markets seem to be more relaxed as well. This past week, stock markets staged a summer rally, bringing both the S&P 500 and Canadian TSX to fresh all-time highs. In fact, since the lows on April 8, the S&P 500 is up about 24%, and the Canadian TSX is up around 23%.¹

What is driving the recent market rally? We highlight three critical catalysts below:

1) Geopolitical tensions easing, oil prices falling

Over the weekend of June 21-22, conflict in the Middle East escalated, as the U.S. launched airstrikes against three of Iran's nuclear-enrichment facilities. This was a surprise strike and came in the midst of Israel and Iran's ongoing conflict that began on June 13.

However, in recent days there has been notable de-escalation in the conflict. While Iran retaliated against the U.S. at its base in Qatar, there were no casualties and no material damage. Of note, Iran thus far has not targeted oil infrastructure or the critical Strait of Hormuz (which is a passageway for about 20% of global oil consumption), and thus disruption to oil flows has been minimal.¹

Bottom line: As a result of the easing geopolitical tensions, oil and energy prices have fallen substantially over the last week. For example, U.S. WTI crude oil, which had risen over 20% in June to $75 per barrel, fell about 13% last week down to around $65 per barrel.¹ This move lower in oil prices is not only supportive for consumers as we head into the summer driving season, but also a positive for keeping inflationary pressures contained. The fall in oil and energy has appeared to support market sentiment in recent days as well, helping drive equity markets toward new highs.

2) Federal Reserve and Bank of Canada still poised to cut rates

A second reason that stocks have rallied is likely around the prospects of lower interest rates by year-end. The Federal Reserve at its June 17-18 meeting outlined potentially two rate cuts in 2025 in its updated "dot plot," or best estimate of the fed funds rate. It also continues to show ongoing rate cuts in 2026 and 2027, with a longer-term fed funds rate of 3.0%, well below today's 4.25% - 4.5% rate.

Similarly, the Bank of Canada (BoC) has already cut rates seven times, bringing its policy rate from 5% to 2.75%. However, given inflation has come down in Canada, and growth may be softening, there is room for the BoC to cut rates one or two times further.

While both central banks acknowledge that there is uncertainty around the path forward, especially with tariffs adding complexity and potentially putting upward pressure on inflation in the near term, in our view the Fed and BoC remain on track to move short-term interest rates gradually lower.

The recent data is also supportive of rate cuts, in our view. As noted above, oil and energy prices have moved sharply lower in recent days, which helps support lower headline inflation. We also have seen inflation readings thus far that are in line or below expectations and remain contained. Consumer price index (CPI) inflation, for example, in both Canada and the U.S. has also come down to under 2.5%.¹

Finally, recent consumption measures appear to point to softening as well. Retail sales in both economies came in below expectations on a headline basis, and last week's U.S. personal spending data for May turned negative as well.¹ These datapoints indicate some potential softening in consumer spending in recent weeks.

Bottom line: Taken together, a contained inflation backdrop with some signs of a softer consumer would imply the central banks are more likely to cut rates, in our view. In addition, the news headlines on tariffs late last week indicated that the U.S. and Canada may be ending trade discussions, which could put further pressure on both economies.

Government bond yields across the curve have moved lower in both economies, with both 2-year and 10-year yields well below highs from earlier this year. These moves lower in interest rates are positive for consumers and corporations and supportive of better stock-market sentiment broadly.

3) Technology sectors continue to lead the way higher

The third driver behind the summer rally is perhaps a renewed momentum in the U.S. technology and growth parts of the stock market. In fact, while the broader S&P 500 is up about 24% since the April 8 lows, growth sectors like technology, communication services and consumer discretionary are up well beyond this in some cases.

In our view, U.S. mega-cap technology stocks delivered during first-quarter earnings season. These companies not only reaffirmed their outsized capital expenditures on AI and infrastructure, but also were largely able to outperform revenue and earnings expectations, even in the face of tariff uncertainty and restrictions in China. In addition, technology and growth sectors led to the downside during the April tariff-induced sell-off, and thus were also on the radar of investors as markets began to recover.

Bottom line: We believe that U.S. technology and AI sectors continue to deliver robust revenue and earnings growth, and we recommend investors continue to hold an equal-weight position in these areas. However, given the recent strong rally in the space, valuations have once again crept higher in tech sectors, and we would expect the pace of gains to moderate. We believe investors can complement U.S. tech and growth investments with sectors like health care and financials, which we think offer better valuations and the potential for catch-up if economic and earnings growth re-accelerates in the year ahead.

Can the rally continue, and how do we position from here?

Overall, markets seem to have been energized in recent days with a dose of summer animal spirits, and momentum in the near term appears to be on investors' side. However, we know that stocks don't move higher indefinitely, and there are several potential catalysts on the horizon that may create some temporary indigestion for investors. These include ongoing tax and trade negotiations, the passing of a U.S. tax bill, and the potential for some cooling in economic growth sparked by higher tariff rates.

We saw just late in the week that the stock market rally faded as the U.S. administration announced it was ending trade discussions with Canada over a digital services tax. There may be further updates to this trade negotiation and others over the next couple weeks that may spark similar market uncertainty and volatility.

Nonetheless, we believe investors can use any volatility or pullbacks as opportunities to position portfolios by diversifying, rebalancing, or adding quality investments at better prices. We recommend overweight positions in U.S. large-cap and mid-cap equities, with exposure to both growth and value sectors. We also believe international equities deserve an allocation in portfolios, albeit with a modest underweight versus U.S. holdings. And finally, within U.S. and Canadian investment-grade bonds, we continue to see value in extending duration, especially as the Fed and BoC, in our view, remain poised to move interest rates gradually lower.

Summer can be a great time to relax and recharge, but it is also a great time to review investments to help ensure you are on track to meet your long-term financial goals. We suggest reaching out to your financial advisor, if you haven't already, for a midyear check-in on your personal investment and asset-allocation strategy.

Mona Mahajan
Investment Strategist

^{Source: 1. Bloomberg} 

Weekly market stats

Source: FactSet, 6/27/2025. Bonds represented by the Bloomberg Canada Aggregate Bond Index. Past performance does not guarantee future results. *4-day performance ending on Thursday.

The Week Ahead

Important economic releases this week include U.S. nonfarm payrolls for June and ISM PMI data.