Returns positive, but harder to come by

Markets get back to the grind

Global financial markets resumed their winning ways in January, but gains weren’t exactly easy to come by and were earned in a climate of heightened volatility that investors may need to get used to as 2025 progresses. So let’s look at how the first month of 2025 stacks up to our expectations of financial markets heading into the new year?

It’s been very much like we predicted. Not because news and events have unfolded exactly as we thought or that equities and bonds have performed to a tee, but because big issues that we identified as volatility inducing in our Outlook have so far been just that, leading to positive, yet fragile global returns that have been a grind to come by.

This includes the ongoing debate about central bank policy and where interest rates are headed from here. At last count, CME Fund Watch says there is a 32.6% chance that the U.S. Federal Reserve’s (Fed) overnight lending rate will be 50 basis points lower in December than now, but a 29.5% chance it will only be 25 basis points below today’s current target rate of 4.25% to 4.5%. Moreover, 10.9% of estimates believe the rate will remain unchanged this year, which only speaks further to the deep uncertainty about the Fed’s actions going forward.

Of course, this is also true of the Bank of Canada and other central banks that are trying to navigate soft landings for their economies as well. Every time a new set of data is released – regardless of where – there is now a reckoning of sorts as probabilities of future rate cuts are adjusted and investors re-position themselves accordingly.

Take for example, some of the back and forth that we’ve experienced in recent weeks, particularly as figures for key U.S. economic indicators like employment, inflation, and retail sales were released earlier in January. For every one of these indicators that suggested more rate cuts than expected may be warranted, there seemed to be another that pointed to the very opposite.

Given that dynamic alone, volatility continues to be about the only certainty in the current market environment, yet monetary policy is not all that is at play right now.

Trump’s second-term wild cards

The Trump administration that took hold on January 20 really is a wild card. It is no secret that President Trump’s second-term agenda could have a large impact on the global economy and financial markets going forward and some of his first flurry of executive orders are bound to resonate if they haven’t already.

Notably, Trump’s decision to rescind his predecessor’s 2023 executive order addressing risks associated with the use of Artificial Intelligence (AI) is seen by some as a fresh boon to AI-related stocks, and we believe it may also mark the beginning of Trump’s plan to deregulate other sectors and industries, which would generally be seen as favourable for equity prices as well.

Meanwhile, his various orders favouring fossil fuels over renewable energy is a clear shakeup for the energy sector, while separate orders limiting immigration could end up having a significant impact on the U.S. jobs market. In fact, by some estimates, there are upwards of nine million undocumented workers in the U.S., many of whom could soon be deported and will need to be replaced. But mass deportations may not only affect labour supply. If employers are forced to pay up to attract new workers, it could also result in wage growth (and higher inflation), which we expect could have clear implications for Fed policy going forward.

Granted, the executive order(s) that have investors most on edge are those yet to be signed in relation to potential tariffs on goods entering the United States from countries such as Canada, Mexico, and China.

Trump seems to be using the threat of tariffs as a negotiating tactic to secure other “wants” of his – including beefed-up security along the Canadian and Mexican border – but they may also be seen as a necessary tool in the U.S. for raising revenues to offset the expected increase in spending that will be associated with Trump’s promise to extend his first-term tax cuts.

Either way, it’s fair to expect new tariffs will be announced by the U.S. administration even if it’s unclear to what degree they will be administered, or which countries are Trump’s ultimate (first) targets. Indeed, the best-case scenario may be a less aggressive rollout on tariffs than has been threatened to date. Not only might this lower the risk of retaliatory measures from countries like Canada, but we believe it would also potentially limit the negative consequences of tariffs, including the potential for higher inflation, or worse, economic recession in the countries most severely impacted. Any toning down of the tariff rhetoric will be met with relief from the global equity and bond markets who fear these negative consequences.

AI selloff a wake-up call

I mentioned earlier that news and events haven’t unfolded exactly as predicted in January. Does the selloff in AI-related stocks fall under that category?

Yes, it qualifies. Or at least the circumstances behind the selloff do. After all, some people are calling it a black swan event, which, by definition, happens without warning. But I’m not sure our investment team was entirely surprised by the rout itself. AI stocks have had a tremendous run over the past couple of years and were probably due for a pullback. The only question was the catalyst that would cause it.

That said, DeepSeek (the new open-source Chinese AI language model at the heart of the storm) was probably not the catalyst most people had in mind. In fact, leading up to the day of selloff, there was very little fanfare about it, except maybe amongst people really in the know. Even so, most investors were left off guard by the news that DeepSeek was supposedly trained on a much smaller budget in terms of semiconductor chips used or energy consumed than its American-made competitors, yet still it seems to provide comparable capabilities. And almost immediately, investors reacted to this news by questioning the economics of the AI trade, particularly as it relates to the level of capital expenditures that incumbent “hyperscalers,” or those building competing capabilities say they require.

But instead of being a sort of death knell for markets, the selloff is more like a wake-up call that tempers some of the exuberance of the AI trade, while offering a new perspective on where it might be headed. And as cooler heads prevail, we believe DeepSeek’s ultimate disruption may be to create efficiency gains for more companies that want to use AI (at significantly lower costs) and that ongoing investment in AI infrastructure is not a waste as some others have suggested, but a path to even more products and acceptance.

Clearly, much still needs to be learned (and verified) about DeepSeek’s cost efficiency and overall capabilities, but if its initial claims are true, we expect it’s very likely to be a catalyst for the good, which may drive a much more rapid and accelerated adoption of AI and spur any related productivity gains that come with that.

Ultimately, investing in artificial intelligence may remain beneficial to investors, however, like financial markets more broadly, that benefit may not always come easy and will often be accompanied by bouts of heightened volatility.

Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd.

Notes and Disclaimer

© 2025 by AGF Ltd. This article first appeared in AGF Perspectives. Reprinted with permission.

Commentary and data sourced Bloomberg, Reuters and company reports unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of January 31, 2025, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or reliance on the information contained herein. Investors are expected to obtain professional investment advice.

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