Climbing the wall of worry

Fears of earnings recession fade as corporate activity picks up

There are decades when nothing happens, and then there are months when decades happen. That is what June felt like. Every day it seemed like a new, more extreme headline was coming across the screen. Yet remarkably, equity markets continued their rebound from the April lows, to close the first half of the year at an all-time high. That is called “climbing the wall of worry” and has been impressive to watch.

The backdrop is still wildly uncertain and headline risk remains elevated. A trade war between the world’s largest trading partners is disrupting global supply chains. The largest ground war in Europe since WW2 continues with no end in sight. And the proxy war in the Middle East between Iran and Isreal went live, including U.S. involvement for a few hours. Yet none of that has affected investors’ risk appetite as cash continues to be pulled back into the market off from the sidelines.

When President Trump was re-elected last November, investors cheered the outcome and rallied markets into year end. While it wasn’t the smoothest path, his first term was very positive for wealth creation as he focused on growth over conflict, and many were looking forward to a repeat of that performance. However, this term has started off on a very different note. Almost immediately tariffs were imposed on both friend and foes, trade agreements were shredded, and executive teams everywhere slammed the brakes on capital plans until able to get a handle on the operating landscape. Markets are well known to hate uncertainty, and uncertainty is what we have in record amounts.

One of the fears coming into this year was the ability to avoid an earnings recession. After several years of strong markets, valuations had become stretched, and for markets to move higher, earnings need to grow. Tariff and trade uncertainty put a damper on this as corporations announced first-quarter results. But these initial fears appear to be receding. The consumer appears to have adjusted to higher prices and resumed normal activities. This has allowed companies to relaunch previously stalled capital expenditures and growth plans. Corporate activity is picking up, which has resulted in several takeovers and IPOs. All healthy outcomes and a primary reason banks and other financial players have led equity returns recently.

Second-half outlook

But what does the second half hold? The risk is this recent market surge has pulled forward all the good news we could have expected. With markets at these levels, we are now pricing in earnings growth. There is also the expectation that trade wars will end shortly with a flurry of deals over the summer. In addition, markets are now expecting President Trump to return to his promise of cutting taxes and government regulation to become more business friendly. Those would all be a great outcome, but can it all happen?

One area to focus on for signals will be the bond market. This was expected to be the year of rate cuts, and we are still waiting for the first cut from the U.S. Federal Reserve’s rate-setting Open Market Committee. Bond yields have remained higher than many expected as inflation has not cooled to the extent anticipated. Bond auctions and debt refinancing will be a key story over the summer as well as the growing risk from President Trump’s attempts to force rate cuts or undermine Fed Chair Powell.

Back in Canada, it feels like a complete reset. Gone is a government that seemed to do everything in its power to stifle growth, replaced with one that is saying all the right things to turn the ship around. This has caught global attention with the Canadian dollar off to a strong start and increased optimism for future growth. Infrastructure building looks like a theme that could be with us for a while. The S&P/TSX is enjoying a nice start to the year, outperforming other North American markets for the first time in a while.

Investment implications

While overall market returns year-to-date have been ahead of what most might have been expecting given the backdrop, this isn’t the time to be complacent or chase performance, and we continue to be more defensive across our positioning. Summer markets are risky, and strange things happen with low volumes.

It does need to be pointed out that even though markets are at all-time highs, one of the best-performing assets this year has been gold, the original defensive asset. A 25% rally off the “Liberation Day” lows, for most markets, is making everyone feel a little better heading off for summer vacations.

But just because the last few weeks have been calm it doesn’t mean it’s going to be all clear sailing. We believe lots of good news is already priced into the market, which makes it tough for positive surprises.

Greg Taylor, CFA, is the Chief Investment Officer and a Portfolio Manager at PenderFund Capital Management. Excerpted from Pender Strategic Growth and Income Fund – Q2 2025 commentary.

Visit the PenderFund website for more commentaries, analysis, and insights from Pender’s investment professionals.

Notes and disclaimer

Content © Copyright 2025 by PenderFund Capital Management Ltd. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Securities mentioned in this article are for illustrative purposes only and do not constitute an investment recommendation. Always consult your financial advisor before investing in any security.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in net asset value and assume reinvestment of all distributions and are net of all management and administrative fees, but do not take into account sales, redemption or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter and is provided for your information only. Every effort has been made to ensure the accuracy of its contents. Certain of the statements made may contain forward-looking statements, which involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Image: iStock.com/BrianAJackson