Amid increased political uncertainty and the threat of U.S. trade tariffs, investors can expect muted returns and more volatility this year, according to an outlook report from Edward Jones.
Following last year’s double-digit market returns, this year’s expectation for economic growth, continued consumer spending and normalizing labour markets “underpin an ongoing stock market expansion, albeit perhaps with more bouts of volatility and more modest gains ahead,” the Edward Jones report, released on Thursday, said.
Despite uncertainty related to factors such as U.S. tariffs, “we continue to view market volatility as an opportunity for investors to rebalance, diversify and add quality investments to stock and bond portfolios in the year ahead,” the report said.
Edward Jones’ expectation for positive economic growth in both Canada and the U.S. is based on lower interest rates supporting household and corporate consumption and on potential deregulation and tax cuts in the U.S. “These may be offset by uncertainty around tariffs and trade wars, but we see this risk contained more to specific industries and global peers,” the report said.
Still, protectionism and proposed trade tariffs will likely mean more market volatility. Edward Jones also noted that returns will need to be based on earnings growth, rather than on further multiple expansion. TSX earnings growth is expected to accelerate to 10%, the report said, and S&P 500 profits could grow 10% to 15%, depending on factors such as whether the Trump administration cuts corporate taxes.
Positively, profit growth is expected to broaden to cyclical and value stocks, the report said, not remain concentrated in the tech sector. For example, financials and industrials in the U.S. could benefit from deregulation. Given that backdrop, the report suggested “broad participation” in equity markets in 2025, “potentially rewarding those with well-balanced portfolios.”
Trade wars to increase market volatility
U.S. president-elect Trump has proposed 25% universal tariffs on imports and 60% tariffs on imports from China. The report said countries with large trade deficits with the U.S., including Mexico, Vietnam, Germany, and Japan, could be affected, making their products pricier.
“While currency depreciation might partially offset these [tariff] costs, trade disruption could also lead foreign firms to slow investment and hiring, weighing on economic growth,” the report said.
Canada would also see impacts. In a release on Wednesday, the Canadian Federation of Independent Business said 25% U.S. tariffs on Canadian products, followed by potential Canadian retaliatory tariffs, would lead two-thirds (65%) of small businesses to increase prices for consumers. Earlier this week, the federation sent a letter to the provincial premiers with recommendations, such as reducing the tax burden on businesses and strengthening border security measures to address U.S. concerns.
On Wednesday the Canadian Manufacturers and Exporters (CME) sent a letter to the federal government and federal party leaders urging action to protect the manufacturing sector from the threat of U.S. tariffs. The letter said the manufacturing sector would be hardest hit by proposed U.S. tariffs and that 90% of manufacturers expect significant impacts from the tariffs.
The Edward Jones report said U.S. trade policy will likely continue to dominate headlines and drive bouts of market volatility.
“Given the U.S. is responsible for the majority of Canadian exports, implementation of tariffs on Canadian goods could make domestic exporters less competitive and weigh on Canadian economic growth,” the report said. “From a U.S. standpoint, implementation of tariffs could protect U.S. manufacturing interests but pose an upside risk to inflation and could weigh on U.S. economic growth through a reduction in household real income.”
Overall, the report recommended that investors overweight U.S. stocks versus international bonds, Canadian large-cap stocks and overseas developed market stocks. Such positioning can “help maintain a level of quality with your portfolio while benefiting from more cyclical investments, which are supported by U.S. growth,” it said.
Edward Jones also reminded investors that, based on historical data, markets tend to perform well regardless of which political party is in power. The firm urged investors not to play politics with their portfolios.
“It can be easy to have an emotional reaction when political agendas do not align with your personal values and beliefs,” the report said. “But it can be detrimental to an investment portfolio if you allow yourself to alter your long-term plan based on short-term events.”