Making sense of markets at the midway point of the year with Mackenzie Investments' CIO

Globe and Mail

2 days ago

The first half of 2025 in stock markets is about as easy to summarize as the coming six months are to predict.
Few investors anticipated U.S. President Donald Trump's administration going as far on tariffs as it did on the April 2 'Liberation Day' announcement, and few of those who suffered massive losses in the week that followed predicted markets would have reached new highs before the president's 90-day reprieve ends on July 9.
To help make sense of the past six months, Globe Advisor spoke with Lesley Marks, chief investment officer, equities, at Mackenzie Investments. The conversation on June 26 took place in a rare quiet moment for markets this year.
President Trump was still bashing Federal Reserve Chair Jay Powell, but Iran and Israel had reached a truce, the S&P 500 and the Nasdaq were on the cusp of new all-time highs, and the president wouldn't upend trade talks with Canada for another day.
Ms. Marks discussed the sliding scale of uncertainty, key investment trends, and the top risk facing markets.
Despite everything that's happened this year, stocks aren't far from where they were at the beginning of the year. How do you explain this?
First is what I describe as the theory of relativity. While it has been very chaotic, when you compare where we are today versus where we were three months ago – for example, on 'Liberation Day' – people feel so much more certain. So, think about certainty as being relative. If that was the maximum uncertainty around the path that tariffs would take, and the fact that we have this 90-day reprieve, on a relative basis, people are feeling a little bit more certain. They've also come to almost get used to this chaotic nature of headlines we've seen.
And then the second trend that has been helping markets is, as we all know, markets are forward-looking. While the near-term certainly has some headwinds, the medium-term is giving investors reason to be more optimistic. Some of the things that investors are focused on in looking through this short-term period of uncertainty are, for example, the likelihood that the Fed will move to ease [interest rates] and also the potential of stimulus that will come on the fiscal side from the passing of the One Big Beautiful Bill Act.
Even if markets are at similar levels or a little bit higher than the start of the year, how is the backdrop for equities different now compared to Jan. 1?
One thing that is certainly notable and should be a headwind for equities is that growth rates, when it comes to both economic and earnings growth, are actually lower now than they were on Jan. 1.
But sentiment is quite strong. We went to this very low-sentiment place to basically saying, 'We've looked over the edge, we don't like what we see, and now we feel a lot better,' and investors are having more confidence that the administration is showing a willingness to pivot if things look dark when it comes to policy.
The last piece that impacts both bond markets and equity markets is the outlook for interest rates. Although there's obviously concern about the future for inflation, inflation has been quite surprisingly benign. That's something that, at the beginning of the year, would have been identified as a risk that has not quite played out the way some would have expected by this point in time.
Given this backdrop, what are you looking for in a stock today?
You want to look for stocks that are going to benefit from the key themes or trends that are informing markets, economies, interest rates, growth, etc. For example, we've seen here in Canada a lot of interest around our resource sector, so that's a key theme.
Obviously, AI is a key theme. What we're seeing today is a much greater focus on the productivity benefits of AI. That's particularly important when you think about the impact of inflation. So far, what we've seen are companies taking the brunt of the increased costs that come from tariffs, so they're very much going to rely on things such as AI to generate greater productivity.
A theme that's been stealing headlines today has been related to NATO members' spending on defence as a percentage of their GDP. [It's] not just about traditional defence businesses, but also things that are strategically important, such as critical minerals – even AI. So, some of these expenditures that are great for productivity for countries are going to be included in that extra defence spending calculation.
What do you think is the single biggest risk to markets going into the second half of this year?
The single biggest risk is the one we're talking about today, but we haven't seen yet, which is inflation.
What we've seen so far is that corporations seem to be absorbing the increase in tariffs. But just today, we saw the numbers around the tariff income into the U.S. Treasury, and the numbers are big. Billions are going into the U.S. Treasury from tariffs. It's very much a part of the budget reconciliation, the assumption that these tariffs will pay for some of the tax cuts and any of the fiscal spending. So, in that sense, tariffs are likely – in some shape or form – here to stay.
Eventually, we'll see this come into consumer prices. Businesses are absorbing it today because they view it as temporary. If that proves to be false, then inflation comes back on the table, and that makes it very difficult for the Fed to make decisions about cutting interest rates to support a weaker economy.
This interview has been edited and condensed.