Daily market snapshot

• Stocks finish mixed on Thursday: U.S. equity markets were little changed on Thursday while the TSX posted a modest decline following yesterday's Fed-induced sell-off. The TSX finished lower by 0.3%, while the S&P 500 declined by less than 0.1%. On the economic front, U.S. third-quarter real GDP growth was revised up from a 2.8% annualized gain to 3.1%, extending the recent stretch of strong economic growth. Additionally, U.S. initial jobless claims for last week were 220,000, below expectations for 229,000 and well below last week's reading of 242,000. Overseas, Asian markets were lower overnight, while European markets traded lower as well. Longer-term bond yields continue to trend higher, with the 10-year U.S. Treasury yield closing above the 4.5% mark, while the 10-year GoC yield ticked up to 3.34%.*
• Markets digest Fed rate cut and updated economic projections: Yesterday the Fed delivered a quarter-point rate cut for the second consecutive meeting, bringing the fed funds target range to 4.25% - 4.5%.* In addition to the policy-rate decision, yesterday's meeting also provided updated FOMC economic projections. The median FOMC projection for annual core PCE inflation at the end of 2025 was 2.5%, up from an estimate of 2.2% in September.** Additionally, FOMC members now project the fed funds rate will end 2025 at 3.9% versus expectations of 3.4% in September, implying only two quarter-point rate cuts in 2025 from the current range.** Looking further out, FOMC members now see the fed funds rate reaching 3.1% by the end of 2027, up from the September projection of 2.9% and implying that interest-rates could stay high for longer.** After opening the day flat, stocks sold off sharply Wednesday, with the S&P 500 declining by nearly 3% and the TSX shedding 2.2%. Despite yesterday's reaction, we remain optimistic about the prospect for further equity-market gains in 2025 for the following reasons:
  • U.S. economic growth remains healthy: U.S. real GDP expanded at a 3.1% annualized clip in the third quarter, signaling healthy economic growth.* In particular, consumer spending (which is responsible for nearly 70% of U.S. GDP) grew by a robust 3.7%, while nonresidential investment grew by a healthy 4%, signaling that businesses continue to invest despite elevated borrowing costs. Acknowledging this strength, the Fed upgraded its GDP estimate for this year to 2.5% from 2%. Additionally, the NFIB Small Business Optimism Index rose to its highest since 2021 in November, reflecting improved sentiment from small businesses after a period of weakness. While Canadian economic growth has lagged, signs of improvement have emerged, with household consumption growing at a 3.5% annualized clip in the third quarter, the best rate in over a year.* Lower interest rates from the Bank of Canada over the coming months could provide further support to domestic household spending.
  • Labour-market conditions are supportive: A key driver of resilient economic growth over the past two years has been a strong labour market. The U.S. unemployment rate registered at 4.2% in November, well below the 30-year median of 5.1%.* Additionally, the strong U.S. nonfarm-payrolls gain in November brought the 2024 monthly average to 190,000.* While below the 2023 average payroll growth of 251,000, this year's pace of job creation remains above the 10-year average of 160,000.* In Canada, the unemployment rate rose to 6.8% in November, below the 30-year median of 7.1%.*
  • Corporate profits are rising: After roughly flat growth in 2023, S&P 500 earnings per share is expected to grow by 9% in 2024, which would be the strongest annual earnings growth rate since 2021.* Looking ahead to 2025, analysts expect S&P 500 earnings to grow by nearly 15%.* The TSX is expected to see healthy earnings growth as well, with 2024 estimates calling for 4.4% earnings growth and 2025 estimates pointing to nearly 12% growth.* We believe a healthy economy creates a solid foundation for corporate profits to expand in 2025.
• Global central banks in focus: In addition to the Fed, interest-rate decisions from the Bank of England (BoE) and Bank of Japan (BoJ) are in focus this week. The BoE opted to leave its policy rate at 4.75% this morning. Economic growth in the U.K. has been relatively lackluster, with real GDP contracting in both October and September while inflation has been stubborn. The BoJ opted to hold its policy rate steady overnight as well, at 0.25%.* Unlike most other developed-economy central banks, the BoJ is looking to raise interest rates, as Japan's economy looks to overcome sluggish economic growth and deflationary pressures from the past several decades.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **December 2024 FOMC Summary of Economic Projections}

• Stocks drop on Fed outlook for fewer interest-rate cuts ahead – The TSX and major U.S. equity markets closed sharply lower on Wednesday as the Federal Reserve (Fed) cut its policy rate, as expected, but also signaled expectations for fewer rate cuts over the next few years. The Dow Jones Industrial Average declined for the 10th consecutive trading day, the longest down streak in 50 years*. All sectors were down for the day, as consumer discretionary and real estate stocks led markets lower. In global markets, Asia was mixed, as investors assessed Japan's smaller-than-expected trade deficit for November and as markets await the Bank of Japan's rate decision (no change expected). Bond yields rose, with the 10-year Government of Canada yield at 3.21% and the 10-year U.S. Treasury yield at 4.51%. The U.S. dollar advanced versus major currencies on the prospect of higher U.S. interest rates relative to those of international markets. In the commodity space, WTI oil and gold traded lower*.
• Fed cuts policy rate and releases updated economic projections - The Fed's Federal Open Market Committee (FOMC) concluded its December meeting today, cutting the target range for fed funds by 25 basis points (0.25%), as expected**. This action marks the third rate cut of this cycle, bringing the policy-rate target range to 4.25% - 4.5%. The fed funds rate likely remains in restrictive territory at about 1.5% above the Fed's preferred core inflation measure, as a neutral rate is generally about 1% above inflation. We expect the Fed to slow its pace of easing, potentially pausing in January, followed by no meeting scheduled for February. FOMC also updated its economic projections for the next few years, cutting expectations to two rate cuts next year, down from four, while revising up forecasts for growth and inflation***.
• Attention turns to Fed's preferred inflation gauge - The U.S. personal consumption expenditure (PCE) index for November will be released on Friday, with forecasts calling for inflation to rise to 2.5% annualized, up from 2.3% the prior month*. The Fed's preferred inflation measure, core PCE, which excludes more-volatile food and energy prices, is expected to tick up to 2.9%. Looking at more recent trends, core PCE is forecast to rise 0.2% month-over-month -- about in line with the average over the past six months -- which translates to 2.4% inflation annualized. Core PCE remains above the Fed's 2% target, largely due to still-elevated shelter inflation. However, the shelter component continues to moderate, up 5.0% year-over-year in October, compared with over 6.0% earlier in the year. Shelter PCE should continue to slow as it catches up to market-based measures, such as the Case-Shiller U.S. National Home Price Index****, which was up 3.9% in September from a year earlier.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet ** CME FedWatch *** U.S. Federal Reserve ****S&P Dow Jones Indices}

• Stocks close lower ahead of Fed rate decision – Major equity markets declined on Tuesday, with small- and mid-cap stocks trailing large-cap stocks. The Dow Jones Industrial Average declined for the ninth consecutive trading day, the longest down streak since 1978. Markets were broadly lower, as just the consumer discretionary sector posted gains. Prime Minister Justin Trudeau has named public-safety minister Dominic LeBlanc as Finance Minister following Chrystia Freeland's resignation on Monday. LeBlanc, who was sworn in earlier this afternoon, has held a number of cabinet positions and has been a member of Parliament since 2000. In global markets, Asia and Europe were down, as investors await decisions from the Federal Reserve (Fed) and Bank of England. Bond yields were mixed, with the 10-year Government of Canada yield down to 3.15% and the 10-year U.S. Treasury yield at 4.40%. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil dropped on demand concerns following China retail sales for November, which were below forecasts*.
• Markets focus on FOMC meeting and Fed's preferred inflation gauge – The Fed's Federal Open Market Committee (FOMC) will conclude its December meeting on Wednesday, with markets expecting a 0.25% interest-rate cut**. If the Fed cuts, it would mark the third rate cut of this cycle, likely bringing the policy-rate target range to 4.25% - 4.5%. In our view, the Fed is likely to cut rates by 0.25% this week, then begin to slow the pace of easing, potentially pausing in January, followed by no meeting scheduled for February. The personal consumption expenditure (PCE) index for November will be released on Friday, with forecasts calling for inflation to rise to 2.6% annualized, up from 2.3% the prior month*. The Fed's preferred inflation measure, core PCE, which excludes food and energy prices, is expected to tick up to 2.9%. Importantly, core PCE is forecast to rise 0.2% month-over-month - about in line with the average over the past six months - which translates to 2.4% inflation annualized. We believe the recent trend and estimate for November indicate that inflation continues to cool, though at a slowing pace. With the target range for the fed funds rate currently 4.5%-4.75%, monetary policy is restrictive, as a neutral rate is generally about 1% above inflation, which should allow the Fed to ease toward a more neutral stance. Bond markets are currently pricing in expectations for 0.75% of Fed rate cuts over the next 12 months**.
• Key inflation measure rises in line with expectations – Consumer price index (CPI) inflation for Canada ticked down to 1.9% annualized in November, below estimates and the prior month's reading, both of which were 2.0%. Shelter inflation slowed to 4.6% year-over-year, down considerably from 6.5% earlier this year. The Bank of Canada's (BoC) preferred measures of core inflation held steady at 2.6% for CPI-median and 2.7% CPI-trim, both of which were upwardly revised by 0.1% for October***. These readings remain in BoC's 1%-3% target range, which should keep the central bank on its interest-rate-cutting cycle, though the pace is likely to slow. Lower interest rates should reduce borrowing costs for businesses and consumers, which is supportive of the economy.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet ** U.S. Census Bureau}

• U.S. tech leads market higher; Canada, Europe and Asia end lower – Though the TSX and Dow were down for the day, a strong showing from the tech-heavy Nasdaq pushed U.S. stocks higher. Excitement around artificial intelligence continued, with shares of Broadcom rising another 11% following last week's 25% gain.* The key catalyst this week will be the Fed rate decision on Wednesday, when the bank is expected to take another step toward removing some of its restriction while signaling a slower pace ahead. In Canada, government bond yields and the loonie were little changed after Finance Minister Chrystia Freeland resigned. Elsewhere, international markets lagged after China retail sales slowed unexpectedly, suggesting that more stimulus is needed to reverse concerns about the country's economy.
• All eyes on the Fed - Last week several major central banks, including the Bank of Canada and European Central Bank, lowered their policy rates, aiming to reach a neutral rate, a level that’s neither restrictive nor stimulative for the economy. This week the spotlight is on the Fed, as the Committee is expected to cut interest rates by a quarter point to 4.25%-4.5%. The release for the December meeting will also include updated economic and interest-rate projections that may be revised higher to reflect a slower pace of easing in 2025. Unlike Europe and Canada, U.S. growth has been stronger, while progress on inflation has slowed. The Fed may choose to pause in January and cut rates two or three times in 2025, instead of the four that were signaled previously. We expect the fed funds rate to settle around 3.5% - 4% by the end of the year, keeping the 10-year Treasury yield in the 4%-4.5% range.
• Cautious optimism heading into 2025 - Stocks are on track to end the year with strong momentum and above-average returns. The consumer remains supported by a healthy labour market, lending standards are easing, and the manufacturing sector may stage a recovery in 2025. This is all with the backdrop of the Fed looking to gradually remove its restriction on the economy and shift to a neutral stance. Despite solid fundamentals, Year three of this bull market may not be as smooth of a ride. Policy uncertainty around trade, immigration and tariffs is high, as are expectations for pro-growth initiatives. Worries around inflation or growth may trigger pullbacks, which we would view opportunistically, as the longer-term uptrend remains intact. Overall, earnings growth will have to do the heavy lifting for market returns instead of further valuation expansion, implying slower gains but still positive returns.

Angelo Kourkafas, CFA
Investment Strategist

^{Source: *FactSet}

• Stocks finish mixed on Friday: North American equity markets were mixed on Friday, with the TSX posting a decline of 0.6%, while U.S. markets were little changed. On a year-to-date basis, the S&P 500 is up about 27%, while the Nasdaq is up around 33%*. The Canadian TSX, which is less weighted in technology, is up around 21% in 2024. Meanwhile, Treasury yields continue to remain elevated, with the U.S. 10-year yield around 4.40%, well above its September lows of around 3.6%*. In our view, this move higher is a combination of better U.S. economic data and the expectation of a shallower Federal Reserve rate-cutting cycle in 2025.
• A resilient U.S. economy was a key theme for 2024: Since 2020, U.S. economic growth has been impressive, with GDP growth rates well above long-term trends. 2024 has been no exception. The quarterly annualized growth rates this year have averaged 2.5%, and the fourth quarter appears on pace to exceed this. According to the Fed GDP-Now forecast, the fourth-quarter economic growth forecast is near its highest since the quarter began, at around 3.3%*. We know the backbone of the U.S. economy is the consumer, which drives about 70% of GDP. Of course, consumers have faced challenges over the past year in elevated inflation readings and higher interest rates, which have pressured both spending and borrowing. Nonetheless, data continues to point to healthy rates of consumption in the U.S., particularly for services, including leisure, hospitality, travel and dining. Part of this has been driven by positive trends in real wage gains across households, in both the U.S. and Canada. Since 2023, wage growth has outpaced the rate of inflation, which has been supportive of consumer confidence and consumption*. We would expect this trend to continue as we head into 2025 and as inflation, in our view, moderates further and remains contained in the 2% - 3% range.
• Continue to use pullbacks as opportunities – As we head into 2025, the U.S. and Canadian economies will undoubtedly face challenges, and markets will have new "walls of worry" to climb. These could include uncertainty around policy coming out of the new White House. Policy changes to areas like tariffs and immigration could weigh on consumer confidence, inflation, and overall economic growth. Any escalation in trade conflicts could also spark volatility and uncertainty. However, in our view, the most extreme versions of these policy proposals are unlikely to be adopted, and the overall impact to the economy will likely be contained. Given the fundamental backdrop with economies that continue to grow at healthy rates, investors can use market volatility as an opportunity to ensure that their investments are well-positioned for this environment of solid growth amid heightened uncertainty. We recommend remaining overweight in U.S. stocks, particularly large-cap and mid-cap stocks, with a mix of growth and value sectors. While mega-cap technology led the way higher for much of the last couple of years, we believe sector diversification will be a key theme and driver of returns. Within the bond market, we recommend reviewing short-duration bonds and cash-like instruments to ensure that portfolios are not too overweight cash. With yields likely headed lower in the next year, we believe excess cash can be gradually deployed into strategic allocations in stocks and bonds.

Mona Mahajan
Investment Strategy

^{Source: *FactSet}