Weekly market wrap

Focusing on what’s known amid trade uncertainty

Key Takeaways: 

• Newly announced tariffs and inflation worries continue to drive market volatility as the first quarter wraps up. A 25% tariff on all non-U.S. made autos was unveiled ahead of a broader announcement of reciprocal tariffs set to take effect on April 2.
• The April 2 announcement will provide some clarity around tariffs, but uncertainty may stay elevated as other countries retaliate or negotiate in the weeks ahead.
• The U.S. economy is less reliant on trade, but tariffs will still act as a drag to economic growth and push goods inflation higher. In Canada, the drag will be larger, and the economy could stagnate. However, we don’t expect tariffs to derail the bull market.
• Corporate profits are rising, the private sector continues to add jobs at a healthy pace, the BoC is cutting rates, and U.S. policy agenda may soon shift to pro-growth measures.
• With so many potential outcomes, a V-shaped rebound in stocks is less likely. We recommend balance between growth and value investments and see opportunities in U.S. health care and financials, which are less exposed to tariff uncertainty and have attractive valuations. Financials may also benefit from potential pro-growth policies.

Tariffs and trade policy remain front and center as the U.S. administration announced a 25% tariff on all autos not made in the U.S. This move comes ahead of a highly anticipated April 2 announcement that should outline a framework for imposing reciprocal tariffs on a country-by-country basis. While the upcoming announcement may provide some much-needed clarity for businesses making capital spending decisions, uncertainty is likely to remain elevated as other countries respond and negotiations intensify. At this stage, the scope, magnitude, timing and persistence of tariffs remain unknown. However, for investors, maintaining a focus on what’s known can be a helpful guide to navigate the headline and market volatility.

What’s new? 25% auto tariffs announced

Last week, U.S. president Trump signed an executive order placing tariffs on auto imports to the U.S. The tariffs take effect April 3 and target fully assembled vehicles, but will expand to include auto parts by May 3 (though tariffs will not apply to USMCA-compliant parts). The announcement weighed on shares of automakers and parts suppliers, as well as the stock markets of countries with large auto exposure such as Germany and South Korea. (The auto sector represents 7% of the German DAX vs. 0.5% of the TSX and 2% of the S&P 500.)¹

It remains to be seen whether these tariffs will be permanent, as the U.S. president indicated, or can be negotiated away. If they remain in place, they can incentivize foreign manufacturers to move production to the U.S, but that would be a multiyear process. In the near term, auto tariffs will likely lead to higher prices for consumers as automakers pass along some of the additional cost.

Given that about half of the 16 million cars sold last year in the U.S. were imported, the sector will experience a disruption.¹ And there could potentially be knock-on effects, such as higher prices for used cars, repairs and insurance. Consistent with this line of thinking, rental car stocks jumped last week on the view that tariffs will bolster the value of their fleets as these companies eventually sell their used vehicles.¹

What’s coming? Reciprocal and other sector-specific tariffs

The auto tariffs were unveiled ahead of a broader announcement of reciprocal tariffs set to take effect on April 2, aiming to raise levies to match those of other countries. The tariffs would apply on a country-by-country basis and may include other non-tariff barriers such as value-added taxes (VATs) into the calculation. The idea is to level the playing field by charging trading partners what they charge the U.S., which would likely hit harder for some of the emerging-market nations.

A reciprocal policy suggests that some countries with low barriers for U.S. products may be exempt or receive reductions, which is a softer approach than the universal tariffs initially proposed. Separately, the administration has suggested that additional product-specific tariffs, including lumber and pharma, would be coming soon. For Canada, the punitive 25% tariffs may be dropped but exports to the U.S. will still get hit with retaliatory tariffs in addition to product-specific tariffs.

Uncertainty could soon peak but not go away

As the adage goes, markets hate uncertainty, and right now there is plenty of it. The Economic Policy Uncertainty Index, which tracks how many financial articles mention the words “economic uncertainty” and looks at any divergence in economic forecasts, is at its highest since the early days of the pandemic.¹ Given this backdrop, it is not surprising that investors are having a hard time assessing the impact of a moving target as trade headlines change.

The April 2 announcement will help provide some clarity and transparency in the administration’s approach, but may not answer all of investors’ questions. In response to the reciprocal tariffs, some countries may choose to retaliate, while others may try to negotiate, and this process may play out over several months. Nonetheless, developments during the second quarter may help clear out some of the fog and speculation around tariffs.

Focusing on what’s known

All else equal, tariffs will likely act as a drag to economic growth and push goods inflation higher. Canada's economy will be more affected as trade accounts for almost 70% of GDP vs. 25% for the U.S.² The potentially stagflationary impact has spooked investors and has contributed to the first 10% correction in the S&P 500 in a year and half.¹ But the TSX has held up better and is only down 4% from its high, a good reminder that the stock market is not the economy as the sectors impacted most by tariffs carry a small weight in the index.

Rather than chasing headlines, investors can focus on what’s known: The fundamental drivers of market performance remain more supportive than harmful. Here are five reasons why trade developments may not derail the expansion.

1. Corporate profits are rising, which is not what tends to happen when the economy is about to enter a recession. While S&P 500 and TSX earnings estimates for the full year have been revised lower over the last couple of months, they still point to more than 10% growth, which is faster than the long-term historical average of 6%–7%.³
2. Unemployment remains low, and the private sector continues to add jobs at a healthy pace. In the U.S. government layoffs will apply some downward pressure to payroll growth, but federal employees account for only 2% of total employment.³
3. The BoC has proactively eased policy ahead of the tariff headwinds and will likely continue to cut rates this year. The Fed is taking a wait-and-see approach, but officials are still projecting two rate cuts. Upside risks to inflation and rising consumer inflation expectations may keep the Fed on a prolonged pause. However, policy is considered restrictive, and the bar for rate hikes is high. Historically, it is aggressive central bank tightening that ends bull markets.
4. The U.S. policy agenda may soon shift to pro-growth measures and the Canadian government will likely provide fiscal support to soften the blow for the economy. A lot of the focus early in the year has been on trade and efforts to constrain government spending in the U.S. However, the U.S. administration may start shifting its attention to more market-friendly policies, which are taking longer to implement. Pro-growth policies such as tax cuts and deregulation are key parts of the proposed policy mix and can potentially support growth and the budding recovery in manufacturing.
5. Credit spreads for high-yield bonds, which are sensitive to economic growth and often tend to provide a leading warning ahead of economic trouble, remain narrow, not raising any red flags. And more broadly, financial conditions are supportive, while loan demand appears to be picking up.¹

Portfolio implications

With trade uncertainty lingering in the months ahead, a V-shaped rebound in stocks appears less likely. However, if economic and earnings growth remains positive as we expect, history suggests pullbacks can be opportunities. Investor sentiment has soured because of the trade uncertainty, leaving room for potentially positive surprises if developments are not as bad as feared. Therefore, we reiterate our slight overweight to equities relative to bonds across portfolio objectives.

Looking closer at portfolio positioning, last year’s underperforming asset classes (overseas equities), style (value) and sectors (health care) have led the way this year. This rotation could continue, but the range of outcomes remains wide. An escalating trade war could strengthen the dollar, weigh on global growth, and trigger a rotation back to the U.S. On the flip side, a more targeted approach to tariffs and successful negotiations would support the performance of overseas and Canadian stocks.

We recommend balance between growth and value investments, and see opportunities in U.S. health care and financials, which are less exposed to tariff uncertainty and have attractive valuations. Financials may also benefit from any pro-growth policies.

At the end of the day, portfolio diversification will likely be critical for investors to navigate this year’s twists and turns, while balance with fixed-income investments can offset some of the periodic equity volatility.

Angelo Kourkafas, CFA
Investment Strategist

^{Sources: 1. Bloomberg, 2. World Bank, U.S. Census Bureau, Eurostat, 3. FactSet}
 

Weekly market stats

Source: FactSet, 3/28/2025. Bonds represented by the Bloomberg Canada Aggregate Bond Index. Past performance does not guarantee future results. *Source: Morningstar Direct, 3/30/2025.

The Week Ahead

Important economic releases this week include the domestic labour force survey and U.S. nonfarm payrolls report.