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Half-time review: equity update

Published on 07-11-2025

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Second-half outlook after six months of turbulence

 

The first half of 2025 was marked by significant market turbulence, largely triggered by the announcement of higher tariffs on Liberation Day at the beginning of April. While global equity volatility normalized quickly after the initial shock, and the V-shaped recovery has been remarkable, equity markets remain susceptible to ongoing policy and geopolitical risks in the second half.

We believe the factors driving equity performance in the second half of 2025 will likely be similar to the first half. This involves a complex interplay of macro factors, geopolitical concerns, and monetary policy. We anticipate a tug of war between weakening macro data from the tariff shock and the underlying resilience of the U.S. and global economy. Deregulation, tax cuts, and potentially lower short-term borrowing rates are expected to be the key drivers, at least in the U.S., to help markets, along with a still dominant AI theme.

U.S. equities: resilience tempered by concern

Both the U.S. economy and consumers have shown resilience amid extreme policy uncertainty year-to-date. Corporations delivered healthy earnings growth in Q1, with S&P 500 companies showing a solid 7.6% earnings surprise, significantly above the typical quarterly average. This is encouraging from a fundamental standpoint, combined with the Trump Administration’s pivot from tariffs to tax cuts and plenty of cash on the sidelines. The “pain trade” for equities remains to the upside. Markets are back at fresh new highs to begin the second half of the year, and we believe they’ll likely see a continued push higher, but the line certainly won’t be straight.

Retail activity slowed somewhat in June compared to May, and remains well below levels seen during peak 2021 meme stock mania. The nature of retail buying has also shifted. Demand for broad aggregate ETFs was still strong, but interest in single stocks has waned, with profit taking beginning to occur, a pattern that is eerily similar to previous market peaks.

Retail’s buy-the-dip mentality has certainly paid off, and while flows were dominated by ETFs, it’s interesting to see that the surge in demand for U.S. exposure is predominantly homegrown. The chart below shows evidence that foreign (non-U.S.) buying of American equity ETFs may be waning, while domestic inflows continue. Foreign-listed U.S. equity ETFs would be the go-to ETFs for foreign investors looking to gain U.S. exposure. Interestingly, net-flows have been negative for the past three months, with an acceleration of net-selling over the past month. It’s not just Canadians who are going elbows up; that same sentiment is taking hold globally.

We remain wary, with a slight underweight to U.S. equities due to several factors:

Underperformance – In the first half, the S&P 500 rose 6.2%, and only 0.6% in Canadian dollars, significantly lagging international markets, which rose 20.3%, or 13.9% in Canadian dollars. Canada also managed to outperform so far this year, with the TSX up 10.2% YTD. It’s quite the spread, and we believe the relative underperformance will persist.

Elevated valuations – U.S. stocks are currently overvalued relative to their historical averages, with a forward p/e of 22x, the S&P 500 is currently trading 23% above its 10-year average. The chart below outlines valuations across the globe, and the U.S. remains the only outlier. Though valuations in Canada and international equities are currently at one-year highs, they remain at least somewhat in line with long-term averages, trading at a 7% and 5% premium, respectively. Valuations are a key factor dictating potential future returns. Much like the beginning of the year, the current setup still favours equities outside of the U.S.

Narrow market leadership – In a backdrop of sluggish growth and higher-for-longer rates, we are likely to see a repeat of the 2023-2024 playbook of unhealthy narrow market leadership and high market concentration. The U.S. market rebound since April has been led by big tech once again, limiting broader market participation. Breadth isn’t completely terrible, on a technical basis new highs continue to outnumber new lows, and the percentage of companies above key moving averages remains constructive. What is actually more concerning is the dispersion of the so-called Mag 7. As of June 30, only three of the seven (META, MSFT, NVDA) are in positive territory. Given the group makes up nearly a third of the market cap of the S&P 500, if they are not all moving higher, it limits the potential upside of the broader index.

Canadian equities: moderation to come?

The Bank of Canada is adopting a wait-and-see approach amidst declining domestic demand and rising unemployment. The economy is not the stock market, and this is especially so in Canada. Many of the largest sectors (Energy and Materials) are entirely dependent on global supply and demand dynamics and couldn’t care less what happens domestically.

Financials are another matter, and quite frankly, we think the banks have done very well all things considered. TD is the largest contributor to the TSX this year, up 35%; it accounted for 13% of the first half’s return. In our multi-asset portfolios, we remain neutral on Canadian equities.

Flows to Canada have improved recently, but in the second half, Canadian markets would be hard-pressed to meaningfully move much higher without Energy names moving materially higher. Bank valuations are beginning to look somewhat stretched, and we’ve cooled on gold given this year’s advance. Valuations remain attractive, especially relative to our southern neighbours. Without a more positive economic backdrop, we believe it’s hard to be more constructive on Canadian equities given the uncertainty with its largest trading partner.

International equities remain attractive

International assets are viewed as increasingly attractive and have been leading global equities so far this year. Our broader view remains that international markets should continue trading more favorably this year, with European and Asian equities being favoured.

International stocks are currently valued closer to their historical averages, which potentially means greater price appreciation potential compared to U.S. stocks, which appear stretched. In the first half of 2025, European equities were up 16.6% in Canadian dollars. U.S. equities have had a long runway of relative outperformance. The consistency of the outperformance on a rolling five-year basis is impressive, but the relative outperformance is beginning to fade.

Europe’s economy has shown resilience, with data coming in better than expected despite the trade war. The Citi Economic Surprise Index for the Eurozone has been trending higher and stands at 32, compared to -3 for the U.S. Increased infrastructure and defence spending, notably Germany's €1 trillion stimulus package, are positive tailwinds for European growth. Most major non-U.S. central banks are expected to continue the gradual easing of monetary policy, which adds to the tailwind.

International diversification is increasingly paying off. After years of U.S. outperformance, many global portfolios are significantly overweight in U.S. assets, and a gradual rebalancing is expected as investors continue to add to non-U.S. assets. This stat we came across is interesting: A mere 1% shift of value from the 10 largest U.S. stocks to the 10 largest international stocks in the MSCI EAFE Index could increase their market cap by 7.5%. This diversification also provides exposure to different sectors besides big tech.

Final thoughts

We have no crystal ball, and if the first half has taught investors anything, it’s that the next three-and-a-half years will be full of ambiguity and bursts of rapid change. Markets reflect the past, but investing is about positioning in the best way possible to anticipate what comes next. Given the uncertainty and our expectations for a bit of a growth scare, we believe focusing on valuations and resilient growth is a good start.

Craig Basinger is the Chief Market Strategist at Purpose Investments Inc. and portfolio manager of several Purpose funds, including Purpose Tactical Thematic Fund.

Notes and disclaimer

Content copyright © 2025 by Purpose Investments Inc. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. This article first appeared on the “Market Ethos“ page of the Purpose Investments’ website. Used with permission.

Charts are sourced from Bloomberg unless otherwise noted.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Image: iStock.com/NicoElNino

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