Quarterly Recap Q2 2025: Business as Usual

Global equity markets, excluding US Small Cap, posted strong double-digit returns in Q2, with 'growth' stocks, led by Information Technology, reclaiming leadership as 'defensive' sectors underperformed, signaling a market looking past initial tariff concerns. International equities, save for the UK and China, also outperformed the S&P 500 for US investors, primarily driven by appreciating foreign currencies against a weakening dollar. Despite ongoing tariff uncertainty, the market's resilience and the continued focus on bottom-up earnings analysis remain key for navigating investment decisions.

Analysis

Global equity markets demonstrated significant resilience in the second quarter, posting strong double-digit returns that reversed the volatility seen in April. A key theme was the rotation back into 'growth' stocks, with the Information Technology sector reclaiming leadership, while 'defensive' sectors such as Health Care, Utilities, and Real Estate underperformed the S&P 500. This shift suggests market participants are looking past immediate tariff concerns, a trend supported by the observation that recent 'growth' sector pullbacks have been driven by sentiment rather than deteriorating earnings. In contrast, the Energy sector underperformed due to cooling oil prices, which remain a headwind for the sector. International equities, with the exception of the UK and China, also outperformed for US investors, though this was primarily a function of a weakening US dollar rather than superior local equity performance. The notable exception was China, which suffered from both direct tariff impacts and a currency peg that prevented it from benefiting from dollar weakness. The analysis concludes that while markets have calmed, the underlying tariff situation remains dynamic, reinforcing the importance of a disciplined, bottom-up investment approach focused on quarterly earnings to assess the true impact on corporate fundamentals.

Key Decisions for Investors

• Given the cyclical leadership between 'growth' and 'value' sectors, investors should assess their exposure to Information Technology, which is currently demonstrating strong momentum, but remain prepared for potential sentiment-driven rotations.
• When evaluating international equity holdings, it is crucial to differentiate between local market performance and currency-driven returns, as sustained outperformance will likely require an improvement in international corporate earnings, which has not yet been observed.
• Monitor company earnings reports closely for tangible evidence of tariff impacts, as this fundamental data provides a more reliable guide for investment decisions than shifting market sentiment.
• Recognize that the Energy sector faces headwinds with oil prices below $70, while an allocation to Canadian equities exposed to precious metals miners could provide a tactical advantage amid recent commodity price appreciation.