Monthly portfolio brief

Remember your portfolio's purpose as markets lose their shine

What you need to know

• Canadian and U.S. stocks have lost some lustre amid growth- and tariff-related concerns, but bonds and overseas equity shone, helping offset the impact of softer Canadian and U.S. markets on well-diversified portfolios.
• 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 across region, style, sector and bond allocations.
• We continue to recommend overweighting equity investments, but we've shifted our offsetting underweight to include both investment-grade bond asset classes.
• We also continue to recommend overweighting U.S. stocks, but we've reduced the magnitude of the overweight and recommend reallocating toward Canadian large-cap and overseas small- and mid-cap stocks, raising the latter to neutral.
• We've recently shifted our equity sector guidance to reflect an overweight recommendation for financial services and health care.

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. Different investments will shine at different points in time. 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.

We recommend overweighting stocks, favouring U.S. stocks over higher-quality bonds and other developed-market stocks, but now by a lesser magnitude. As volatility rises, 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. We expect the U.S. economy to maintain its position of relative strength, especially when compared to other developed markets, given the support of steady labour markets, contained inflation, additional central bank rate cuts and the potential for pro-growth policies and deregulation in the quarters ahead.

The growth rate may moderate amid relatively restrictive monetary policy and the potential for increasing trade barriers, but we continue to expect a soft landing for the U.S. economy in 2025.

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, even if volatility rises.

However, we believe risks and opportunities have become slightly more balanced between developed-market stocks asset classes, particularly given their relative valuations. Therefore, we've reduced the magnitude of the recommended overweight to U.S. stocks and recommend reallocating back toward Canadian large-cap stocks and overseas small- and mid-cap stocks, raising the latter to neutral.

Additionally, within fixed-income, we believe international bonds have become increasingly attractive when compared to Canadian investment-grade bonds as central banks cut rates and growth moderates. Yields in international bond markets are generally higher than in Canada. Given their yield advantage, we recommend reducing the magnitude of the underweight to international bonds by reallocating from Canadian investment-grade bonds. We now recommend underweighting both investment-grade bond asset classes, in favour of U.S. small- and mid-cap stocks.

Within Canadian and U.S. stock allocations, we favour the financial services and health care sectors. We've also updated our opportunistic equity sector guidance to reflect overweight recommendations for the financial services and health care sectors, given our expectation for broadening market leadership beyond mega-cap tech. 

Financial services appear less exposed to tariff uncertainty, and may benefit from deregulation in the U.S., particularly amid supportive economic growth. Health care exposure may help protect against economic softness and offers catch-up potential, given valuations within the sector. We offset these overweight recommendations with underweights to the materials sector, given tariff and inflation uncertainty, and consumer staples, due in part to the potential impact of still-elevated inflation on consumers.

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.