Monthly portfolio brief

Remember your portfolio's purpose as markets lose their shine

What you need to know

• Canadian and U.S. stocks – and mega-cap tech stocks, in particular – lost some lustre amid growth- and tariff-related concerns.
• Overseas markets shone and bonds bounced higher in February, helping offset the impact of softer Canadian and U.S. markets, further highlighting the rotation playing out in markets.
• During periods of volatility, it's important to remember the strength of a portfolio lies in its design, and 2025 is calling for a diversified approach.
• View pullbacks as an opportunity to add quality investments at more attractive prices, diversifying across regions, styles, sectors and bond types.
• We recommend overweighting U.S. stocks to help portfolios benefit from broader markets, supportive growth, contained inflation and easing central bank policies.

Portfolio tip

The strength of your portfolio lies in its design. Maintaining a well-diversified portfolio aligned with your goals can help you benefit from better performing investments as leadership rotates, while helping you stay focused on your north star.

Where have we been?

Canadian and U.S. stocks – and mega-cap tech stocks, in particular – lost some lustre amid growth- and tariff-related concerns. Mega-cap tech stocks garnered much attention over the last two years, and for good reason. In 2024, the growth prospects of artificial intelligence (AI) and the earnings they’ve generated drove 30%–40% returns across technology, consumer discretionary and communication services. Given these three sectors make up more than half of the U.S. large-cap stock market, their strong performance helped U.S. equities enjoy a relatively smooth ride higher.

But more recently, mega-cap tech has fallen out of favour over concerns about elevated valuations and the ability to achieve substantial earnings growth amid increasing competition. The three sectors dropped by an average of 6% in February, and two of them — technology and consumer discretionary — were the only U.S. large-cap stock sectors with negative returns through the first two months of the year.

More broadly, increasing economic growth concerns and trade-policy uncertainties continued to weigh on markets, playing a role in the weakness across Canadian and U.S. stock markets, causing them to lag all other asset classes. U.S. equity asset classes fell the most in February, with U.S. small- and mid-cap stocks, which tend to be the more economically sensitive of the two, falling the furthest behind. Larger, higher-quality U.S. stocks remain among the top-performing asset classes over 12 months, despite their recent volatility.

Volatility continued into March as the U.S. announced new tariffs on goods from Canada, Mexico and China, with varying responses from each country. While negotiations between countries play out, tariff and trade policy uncertainties are likely to be a source of market volatility in the near term, highlighting the importance of staying appropriately diversified.

Overseas markets shone, helping offset the impact of Canadian and U.S. stock underperformance in well-diversified portfolios. Contrary to the weakness within domestic and U.S. stock markets, overseas stocks across developed and emerging markets have provided a bright spot for well-diversified portfolios, following a year of underperformance.

The potential for increasingly supportive economic policies across multiple regions, possible easing in geopolitical tensions and historically low relative valuations have helped offset the weight of tariff-related headwinds, allowing overseas stocks to rotate into the lead. All three overseas equity asset classes were positive in February and are up by 2%–8% year to date.

Bonds provided a ballast as yields turned lower. As has been the case in the past, higher-quality bonds have recently moved opposite from Canadian and U.S. stocks, helping offset the pullback in these markets and enhance the stability of a well-diversified portfolio. Higher quality bonds performed the best in February, but lower-quality international high-yield bonds weren’t far behind and held the lead over the past 12 months. From a return perspective, cash-like investments have fallen toward the bottom of fixed income across both horizons.

Coming into 2025, resilient growth, rising inflation concerns and a more cautious Federal Reserve drove a spike in yields, weakening bonds. More recently, however, growth has shown signs of moderation (particularly amid new tariffs), inflation has remained contained, and multiple major central banks continue to hint at additional easing. Interest rates have turned lower as a result, helping lift returns across all bond asset classes.

What do we recommend going forward?

The strength of a portfolio lies in its design, and 2025 is calling for a diversified approach, in our view. Investments will fall in and out of favour, and different investments will shine at different points in time. But timing market rotations perfectly is impossible.

Maintaining an appropriately diversified portfolio can help you benefit from better performing investments as leadership rotates over time, helping take the guesswork out of investing. And perhaps more importantly, aligning the diversification of your portfolio with your north star — your financial goals — can further help enhance the strength of its design.

We’ve held the view that broadening equity market leadership is likely to reward investors who hold well-balanced portfolios in 2025. This theme is playing out as many value-oriented, cyclical and defensive equities outperform previous leaders within tech. Within fixed income, falling interest rates have helped bonds outperform cash — the reverse of some previous years’ trends. We believe these themes are likely to continue in the quarters ahead.

Your portfolio’s design should be guided by the mix of stock and bond investments most appropriate for your risk and return objectives. Your financial advisor can help you diversify across international and domestic markets, incorporating stocks of various sizes, styles and sectors, and bonds of various maturities and credit quality, according to your circumstances. Keep in mind, diversification does not ensure a profit or protect against loss in a declining market.

Growth and trade policy-related uncertainties are likely to cause unavoidable bouts of volatility, but an appropriately balanced portfolio can help prevent them from becoming a distraction.

View pullbacks opportunistically, favouring U.S. stocks over higher-quality bonds and other developed-market stock asset classes. As volatility returns to more normal levels, view pullbacks as an opportunity to invest in quality investments at more attractive prices, with an eye toward the solid foundation that remains in place, particularly within U.S. stocks.

Above-trend economic growth provided strong momentum for U.S. markets heading into 2025. The growth rate may moderate amid relatively restrictive monetary policy and the potential for increasing trade barriers. While trade negotiations have picked up steam, it remains unknown how long new tariffs may remain in place and what it could take to lift them.

Overall, we expect the U.S. economy to maintain its position of relative strength, supported by steady labour markets, contained inflation, additional central bank rate cuts and the potential for pro-growth policies and deregulation in the quarters ahead. Corporate profits also appear to be on the rise, with lagging sectors playing catch-up to tech. This will likely provide U.S. equity markets an extra boost, especially when compared to other developed markets. Given these supportive fundamentals, we expect a soft landing for the U.S. economy in 2025, helping to provide additional legs to the ongoing bull market.

Given these strengths, we recommend overweighting U.S. stocks across market capitalizations, which we believe can help well-diversified portfolios maintain a level of quality while benefiting from more cyclical investments, which are supported by U.S. growth.

We’re here for you

The value of diversification has been on full display in recent months, given the swings across various markets. It can seem difficult to stay on top of these swings amid a barrage of headlines, but taking a diversified approach to building and maintaining your portfolio can help prevent the feeling that you’ve missed out.

Talk with your financial advisor about your well-diversified portfolio — a strategic design to help you navigate market volatility and rotating leadership while staying focused on what matters most: your financial goals.

If you don’t have a financial advisor, we invite you to meet with a financial advisor to discuss how our strategic and opportunistic asset allocation guidance can help you design a portfolio according to your risk and return objectives, helping you uncover the benefits of a well-diversified portfolio.

Strategic portfolio guidance

Defining your strategic investment allocations helps to keep your portfolio aligned with your risk and return objectives, and we recommend taking a diversified approach. Our long-term strategic asset allocation guidance represents our view of balanced diversification for the fixed-income and equity portions of a well-diversified portfolio, based on our outlook for the economy and markets over the next 30 years. The exact weightings (neutral weights) to each asset class will depend on the broad allocation to equity and fixed-income investments that most closely aligns with your comfort with risk and financial goals. 

Diversification does not ensure a profit or protect against loss in a declining market.

Opportunistic portfolio guidance

Our opportunistic portfolio guidance represents our timely investment advice based on current market conditions and a shorter-term outlook. We believe incorporating this guidance into a well-diversified portfolio may enhance your potential for greater returns without taking on unintentional risks, helping to keep your portfolio aligned with your risk and return objectives. We recommend first considering our opportunistic asset allocation guidance to capture opportunities across asset classes. We then recommend considering opportunistic equity sector and Canadian investment-grade bond guidance for more supplemental portfolio positioning, if appropriate.