Daily market snapshot

• Stocks finish lower: North American equity markets closed lower on Friday with weakness in U.S. mega-cap technology stocks weighing on performance. The TSX finished lower by 0.4% while the tech-heavy NASDAQ declined by 1.5%.* U.S. small-cap stocks were under pressure today as well with the Russell 2000 declining by over 1.5%.* With no major corporate or economic news out today, we'd attribute the risk-off move to profit taking after what's been a strong year of stock market performance. Asian markets were mixed overnight with Japan's Nikkei logging a 1.8% gain while markets in China were flat. U.S. bond yields finished higher with the 10-year Treasury yield closing above the 4.6% mark while the 10-year GoC yield was little changed at 3.3%.
• U.S. bond yields holding near highs for the year: The 10-year U.S. Treasury yield rose again on Friday, finishing above the 4.6% mark. Since the Fed delivered a 0.5% interest-rate cut on September 18, the 10-year yield has risen by nearly 1%.* Domestic bond yields have risen as well with the 10-year GoC yield rising from 2.89% on September 18 to roughly 3.3% today.* Healthy U.S. economic data and uncertainty around U.S. inflation have accompanied the move higher in yields.* In response, performance of U.S. investment-grade bonds has been lackluster. Through September 18, the year-to-date return of the Bloomberg U.S. Aggregate Bond Index was 4.7%.* With yields spiking, the index has given back most of its prior gain, and is now up only 1.2% year-to-date.* Canadian investment-grade bonds have fared better with the Bloomberg Canada Aggregate Bond Index holding on to a 3.3% gain year to date.* Looking ahead, we expect the 10-year GoC yield to spend most of 2025 in the 2.75% - 3.25% range and the 10-year U.S. Treasury yield to hover between 4% - 4.5%.
• Performance check-in; Growth sectors in the lead: It's been another strong year of performance for North American equity markets with the TSX higher by 22% S&P 500 higher by over 28% including dividends through yesterday's close.** At a sector level, it's been familiar faces driving the gains for the S&P 500. Communication services and information technology have been the top performing sectors in 2024, each higher by over 40%.** Consumer discretionary has been the next best performer, gaining 36%.* These three sectors were the top performers of the S&P 500 in 2023 as well. Similarly, technology has been the top performing sector of the TSX, gaining over 40% year-to-date.** Enthusiasm around the growth potential of AI and robust corporate profit growth has led to strong performance in U.S. mega-cap tech stocks over the past two years. While we acknowledge there are reasons for optimism in this area of the market, we believe market leadership could broaden in 2025 beyond mega-cap tech stocks. In particular, profit growth in value-style stocks is expected to accelerate in 2025 after a period of lackluster growth. In our view, this creates a favourable backdrop for broad participation in equity markets over the coming year, potentially rewarding those with well-balanced portfolios.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **FactSet. GICS sectors of the S&P/TSX Composite and S&P 500. Total return in local currency through 12/26/2024.} 

• U.S. stocks close little changed – U.S. stocks closed near the flatline on Thursday but remain firmly in positive territory for the holiday-shortened week. Domestic markets were closed for the Boxing Day Holiday. It was a quiet day in terms of economic and corporate news with most sectors of the S&P 500 finishing the day near the flatline. Overseas Asian markets were mostly higher overnight while most European markets are closed for the Boxing Day Holiday.* Bond yields were little changed as well with the 10-year U.S. Treasury yield closing the day at 4.58%.* In the commodity space, oil prices fell by 0.8% while gold rose by 0.7%.*
• U.S. initial jobless claims remain contained – Initial jobless claims for last week were 219,000, below expectations for 223,000 and little changed from the prior reading of 220,000.* Continuing claims ticked slightly higher to 1.9 million versus the prior reading of 1.86 million.* In 2024, initial jobless claims have averaged 223,000, roughly in line with the 2023 average of 222,000 but well below the 30-year average of nearly 370,000, highlighting that labor-market conditions remain healthy.* In our view, labor-market conditions could moderate over the coming year, however, we expect conditions to remain supportive to consumer spending, helping extend the economic expansion.
• Stocks on pace for another year of strong returns – Through Tuesday's close the S&P 500 has returned over 28% including dividends in 2024.* This year's return follows a 26.3% gain in 2023 and if the current gain holds, would mark the first time since 1999 that the S&P 500 has returned 20% or more in back-to-back years. Since 1940 there have been nine occasions when the S&P 500 returned 20% or more in consecutive years. Of those nine occasions, returns were positive in the third year seven out of nine times with an average return of 13%.** While there is no guarantee history will repeat itself, we believe the fundamental backdrop is supportive for the current bull market to continue into year three. We expect returns to moderate in 2025 but expect stocks to finish the year higher.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **Morningstar Direct, Edward Jones Calculations}

• Stocks rise ahead of the holiday – Investors returned to a festive mood, with U.S. and Canadian equities rising ahead of the Christmas holiday tomorrow. Trading was quiet with markets closing early and the tech-heavy Nasdaq added to yesterday's outperformance. Shares of American Airlines pared some of their earlier losses as the company briefly grounded U.S. flights due to a technical issue. U.S. and Canadian government bond yields rose for the second day with the 10-year at 4.6% and 3.3% respectively*. The recent outsized rise in U.S. yields is helping keep the dollar firm against other currencies including the loonie.  Elsewhere, several European markets were closed but France's CAC rose after new prime minister vowed to cut budget gap.
• The U.S. 10-year yield edges near the high of the year - Last week's Fed decision and updated projections were a catalyst for a shift higher in interest rate expectations as policymakers now see fewer cuts in 2025. The economy continues to perform well and there is some uncertainty around how fast inflation will return to target, which is why the Fed is in no rush to cut rates. With days left to end the year, cash has outperformed U.S. and Canadian investment-grade bonds for the third time in the past four years*. However, the Fed and BoC easing cycles will continue in 2025 and cash yields are already below bond yields, which sets up bonds well to outperform cash investments in our view next year. 10-year yields might spend most of 2025 in the 4% to 4.5% range in the U.S. and in the 2.75%-3.25% range in Canada as we believe there are guardrails on both sides. Additional Fed rate cuts and bond purchases should help keep yields from rising meaningfully. On the other hand, resilient growth, widening deficits and uncertainty around inflation could prevent yields from sustainably falling much further.
• Another strong year despite a bumpy end - Despite the December pullback, U.S. stocks remain on track to post more than 20% gains for the second consecutive year and the TSX is up 18% year-to-date*. The Magnificent 7 stocks accounted for more than half of the S&P 500's advance, though market breadth improved in the second half of the year*. We think solid fundamentals will extend the bull market into 2025, but volatility will likely pick up as investor sentiment is heating up. We expect earnings growth to do the heavy lifting for market returns instead of further valuation expansion, implying slower gains but still positive returns. And despite the narrow gains over the past two years, we see scope for market leadership to broaden beyond the mega-cap tech. While we recommend keeping expectations about returns realistic, there are reasons to be optimistic about the investment outlook for the year ahead. Economic growth remains healthy, corporate profits are on the rise and central bank policy is becoming less restrictive.

Angelo Kourkafas, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks start the holiday week higher – The TSX and U.S. equity markets rose on Monday, recouping losses from earlier in the trading session. Sector performance was broad, as communication and technology stocks led markets higher. Canada real GDP grew 0.3% month-over-month in October, above estimates calling for 0.1% and the prior month's reading of 0.2%. In global markets, Asia was up, boosted by the lower-than-expected U.S. personal consumption expenditure (PCE) inflation readings from last week and the prospect of the Honda-Nissan merger potentially stabilizing Nissan, which has experienced declining sales in recent years*. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil traded lower on expectations for a supply surplus and continued U.S. dollar strength*.
• Potential U.S. government shutdown avoided – Congress passed a continuing budget resolution last Friday evening in bipartisan fashion. President Biden signed the funding bill into law on Saturday, capping a chaotic few days of negotiations and ending the possibility of a government shutdown. The stopgap plan will fund the government at current levels for three months and provide additional disaster relief and farm aid. Raising the Treasury debt ceiling, which had been part of an earlier proposal at President-elect Trump's request, was not included due to lack of support*. We believe the spending package is positive for markets as it removes the risks of a government shutdown, including the potential for disrupted services and delays in government-employee paychecks.
• U.S. bond yields rise to their highest since May – The 10-year Government of Canada yield was little changed at 3.29%, while the 10-year U.S. Treasury yield was up at 4.59%, continuing its broader trending higher over the past few months. The U.S. benchmark yield has risen about 95 basis points (0.95%) from the recent low in September as bond markets** and the Federal Reserve's Federal Open Market Committee (FOMC)*** have reduced expectations for cuts to the fed funds rate. Markets are now pricing in just one additional interest rate cut over the next year as disinflation has slowed and labor markets remain resilient.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet ** CME FedWatch *** U.S. Federal Reserve}

• Stocks rally following key U.S. inflation data: Equity markets finished sharply higher on Friday, reversing losses to begin the day. Markets continued to digest Wednesday's Fed economic projections and contend with the possibility of a U.S. government shutdown. Domestic politics remain in headlines as well, with Prime Minister Justin Trudeau under pressure to resign following finance minister Chrystia Freeland's resignation earlier this week.* Markets looked through the political uncertainty, with the TSX gaining 0.9% and the S&P 500 rising by more than 1% on the day.* Overseas, Asian markets were lower overnight, and European markets traded lower following retail sales data from the U.K. that was softer than expected, while German producer price inflation was higher than expected.* On the economic front, the Fed's preferred measure of inflation, core PCE, rose by 0.1% in November and 2.8% annually, both of which were below expectations.* The lower-than-expected inflation reading surfaced in markets through lower bond yields, with the 10-year Treasury yield ticking down to around the 4.53% mark while the 10-year GoC yield fell to 3.29%.*
• Potential U.S. government shutdown looms: Political uncertainty in the U.S. has been no stranger to markets in 2024 and is back in focus today, as the U.S. faces a possible government shutdown. On Wednesday, President-elect Donald Trump expressed opposition to a bipartisan deal backed by House Speaker Mike Johnson that would have extended government funding until March. On Thursday, a revised solution was proposed that would have extended government funding for three months and would have suspended the debt ceiling for two years. Overnight, this new proposal was rejected in the House; however, as of Friday afternoon, House Speaker Mike Johnson stated that an agreement had been reached on a government funding bill with a vote scheduled for later today. If no bill is passed by 12:01 a.m. tomorrow, the federal government will partially shutdown. Some functions of the government, such as public safety and air traffic control, would continue to function, while many other government workers would be furloughed. Additionally, since Treasury operations are considered essential, the U.S. would continue to make interest payments on Treasury debt. While it speaks to the dysfunction in the political system, from a market perspective we'd expect limited impact from a government shutdown. The last government shutdown, which began in December 2018, lasted 35 days.** However, the S&P 500 returned over 10% during this time.* While we could see short-term volatility due to the uncertainty, we don't expect a potential government shutdown to have a lasting impact on market performance.
• Key U.S. inflation data lower-than-expected: Personal consumption expenditure (PCE) inflation rose by 0.1% in November and 2.4% on an annual basis, both below economist expectations.* Core PCE, which is the Fed's preferred measure of inflation, rose by 0.1% in November, the lowest monthly gain since May, and 2.8% on an annual basis. Both the annual and monthly readings were below economist expectations.* Today's reading was welcome news after a string of recent inflation data that suggested the pace of disinflation is slowing.* Looking into the drivers for November, the services component of the PCE basket rose by just under 0.2%, the lowest since May, while goods prices were roughly flat on the month.* In our view, U.S. inflation should continue to trend lower over the coming months, but likely not without bumps along the way.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **Committee for a Responsible Federal Budget}