Weekly market wrap

Stocks hover near record highs despite tariffs returning to the forefront

Key takeaways:

• Stocks held near record highs set this week, aided by strong performance in the energy and industrial sectors that helped offset the risk-off sentiment driven by tariff headlines.
• New tariffs were announced this week on more than 20 countries, with the 90-day pause extended to August 1.
• The One Big Beautiful Bill Act was passed into law on July 4, extending provisions of the 2017 Tax Cuts and Jobs Act and introducing new tax breaks and spending cuts.
• Canadian employment grew by a better-than-expected 83,000 in June, helping drive the unemployment rate down to 6.9%.

One Big Beautiful Bill Act Signed Into Law

On July 4, the One Big Beautiful Bill Act (OBBBA) was signed into law, extending several provisions of the 2017 Tax Cuts and Jobs Act (TCJA). The legislation also provides tax deductions for tips, overtime pay and social security, subject to limits. The maximum allowable deduction for state and local taxes — known as "SALT" — rises to $40,000, phasing out at incomes of $500,000 or more (Read more about the tax bill in our recent Market Pulse piece: Market Pulse: U.S. Federal Tax Bill 2025).

Tax cuts will be costly for the U.S. government, projected to reduce revenues by $4.5 trillion over the next decade¹. Spending cuts, such as work requirements and eligibility changes for Medicaid and nutrition assistance (food stamps) and the termination of renewable-energy credit programs, total about $1.2 trillion¹. As a result, government deficits are estimated to rise $3.3 trillion over the next decade, shown in the chart below.

Much of the fiscal impact of OBBBA is through extending current tax rates, which limits incremental economic benefits. In addition, much of the tax relief accrues to higher-income households, which are less likely to spend any savings, further reducing stimulative effects. However, certain provisions, such as the reinstatement of 100% bonus depreciation for "qualified property" (which stepped down to 40% in 2025) should provide a boost for corporations and small businesses, in our view. In combination with deregulation, we believe tailwinds should support a reacceleration of U.S. growth in 2026 and 2027.

Tariffs return to the forefront

With the 90-day tariff pause expiring on July 9, President Trump announced new tariffs on more than 20 countries this week. Tariff rates vary widely — from 20%-50%² — to be applied on August 1 unless countries reach trade deals sooner. The new levies are comparable, on average, to those announced on April 2. Some are higher, while others are lower, perhaps signaling flexibility in some cases. A notable outlier is Brazil, for which tariffs are set to surge to 50%, up from 10%, due in part to its legal proceedings against the country's former president Jair Bolsonaro. Canada will face 35% tariffs, up from 25%, though goods that comply with the U.S.-Mexico-Canada agreement (USMCA), which represent the significant majority of trade, will remain exempt. Most other countries will reportedly face tariffs of 15%-20%.

Portfolio opportunity

While U.S. economic growth is slowing, we don't expect it to stall. In our view, this environment is likely to favour stocks more than bonds, and we recommend investors overweight U.S. stocks, offset with an underweight to Canadian investment-grade bonds and international high-yield bonds.

At a sector level, we recommend investors maintain balanced exposure across defensive, cyclical and growth sectors, driven by our expectation for an ongoing broadening of leadership in 2025. We recommend investors overweight financials, health care and consumer discretionary, offset with underweights to consumer staples and materials.

2. U.S. stocks play catch-up versus overseas and Canadian stocks

Since 2010, U.S. economic growth has outpaced most developed markets, contributing to U.S. equity outperformance versus overseas in 12 of the past 15 years.⁴ However, this trend reversed in the first half of 2025, with overseas stocks—particularly in Europe—leading gains. Expansionary fiscal policy in Germany and deeper rate cuts by the European Central Bank have helped boost European equities and lift regional growth expectations. In contrast, U.S. policy shifts are expected to moderate growth in the near term, narrowing the U.S. advantage.

Despite a narrowing gap in economic growth, U.S. corporate profits are expected to continue outpacing those of Canadian and overseas peers. We anticipate stronger U.S. profit growth ahead, likely bolstered by AI tailwinds and a more accommodative policy environment. In contrast, tariffs could weigh on demand for overseas goods, perhaps creating a less supportive backdrop for overseas earnings.

Vietnam secured a trade deal with the U.S. on July 2 that imposes a 20% levy on imported goods originating within that country, a significant drop from the 46% figure announced in April. The U.K. previously signed a trade agreement that charges 10% duties on exports to the U.S. Though the sample size is small, reductions from announced tariff rates appear to be achievable, in our view.

Tariffs are a key focus of the U.S. administration's agenda, meaning tariff rates are poised to rise significantly from the average near 2.3% at the end of 2024³. Tariffs have had a limited impact on inflation thus far, as they have largely been either absorbed by the supply chain, including producers, importers, distributors and retailers, or avoided by stockpiling inventories ahead of their implementation. While the extent to which higher costs are ultimately passed along to consumers is uncertain because supply-chain dynamics are complex, we expect inflation to drift higher over the months ahead. Profit margins likely aren't sufficient across most industries to absorb tariffs of the magnitude proposed. However, these near-term price hikes that are likely not a source of ongoing inflation over the long term, in our view. Any progress in finalizing trade agreements over the coming weeks and months should help further ease trade tensions, in our view, and we think any flexibility in lowering tariffs should help contain U.S. inflation and growth risks. Further progress in Canada-U.S. trade negotiations will also be important in helping to further lift the policy uncertainty that is weighing on the Canadian economy and lower downside risks.

The potential stagflationary effects of tariffs — slower growth coupled with higher inflation — put the Federal Reserve in a difficult position, presenting risks to both its maximum-employment and price-stability mandates. As a result, the central bank is likely to remain on the sidelines a while longer as it seeks greater clarity on the impact of tariffs on inflation. The resilient, though cooling, labor market should allow some more time, in our view, with rate cuts likely resuming in the fall. With the fed funds rate near 4.3% and personal consumption expenditure (PCE) inflation (the Fed's preferred inflation measure) at 2.3%⁴, monetary policy is likely restrictive. While inflation remains above the 2% target, we believe there is room for the Fed to cut interest rates into 2026, likely approaching 3% to 3.5% as inflation moderates over time.

With Bank of Canada's (BoC) policy rate at 2.75%, and CPI below the 2% target, we believe there is room for the central bank to cut interest rates at least one more time, likely in the fall. Falling yields highlight the reinvestment risk of holding too much cash and short-term fixed income.

How to position for what's ahead

We recommend investors use potential volatility as opportunities. We favor U.S. stocks, which offer exposure to higher-quality and more cyclical segments of the market, which are likely to benefit from U.S. growth. The strong performance of overseas stocks this year highlights the importance of maintaining allocations to these regions. We suggest an underweight position in Canadian large-cap and developed overseas large-cap stocks, as these markets face weaker growth prospects and greater trade-policy headwinds, in our view. Canadian large-cap stocks may also be challenged by potential weakness within housing, as well as their larger exposure to commodities, such as oil, which has faced pressure in recent months.

Consider underweight allocations to Canadian investment-grade bonds, in part due to their lower yields relative to the U.S., and international high-yield bonds, where credit spreads are historically tight. Within Canadian investment-grade bonds, we suggest extending duration to lock in yields for longer and potentially benefit from higher prices as the BoC likely cuts rates one more time.

With stocks near all-time highs, markets may experience volatility as economic data potentially softens in the months ahead and trade tensions could persist for a while longer. However, we believe the fundamental backdrop remains intact, and pullbacks can be used as opportunities to invest at better prices or to rebalance to maintain diversification.

Brian Therien, CFA
Investment Strategy

^{Source: 1. Congressional Budget Office 2. Whitehouse.gov 3. Yale Budget Lab 4. FactSet}
 

Weekly market stats

Source: FactSet, 7/11/2025. Bonds represented by the Bloomberg Canada Aggregate Bond Index. Past performance does not guarantee future results. *Morningstar Direct (7/13/2025).

The Week Ahead

Important economic releases this week include domestic manufacturing shipments, inflation and housing starts.