2024 Economic Overview:
Canada: The Canadian economy showed signs of weakening in 2024, with real GDP growth cooling to an average of 1.2%, a decrease from 1.5% in 2023. Despite these challenges, consumer spending saw an uptick in the fourth quarter. Inflation rates moderated, approaching the 2.0% target by year’s end, down from 3.4% at the close of 2023, while core inflation hovered slightly above 2.5%. Responding to these trends, the Bank of Canada adjusted its policy rate downwards to 3.25% in June, following a prolonged period at 5.00%.
United States: The U.S. economy continued to exhibit strength, with real GDP increasing by 2.8% in 2024, consistent with the growth experienced the previous year. Inflation rates declined more gradually, ending the year at 2.7%. The Federal Reserve adjusted interest rates to 4.5% after maintaining them at 5.5% for over a year.
Equity Markets: Both Canadian and U.S. equity markets performed robustly, recording gains of 21.7% and 25.0%, respectively. The U.S. market benefited significantly from the ongoing enthusiasm for AI and major tech stocks, often referred to as the ‘Magnificent 7.’ In Canada, the rise was more diversified, with significant contributions from sectors like Technology, Financials, Energy, and Materials.
2025 Macro Forecasts:
Canadian Interest Rates: We anticipate a further reduction in interest rates to around 2.25% by mid-2025 amidst a lingering economic softness. However, these lower rates are expected to gradually foster stronger GDP growth, potentially surpassing 2%. The uncertain impact of U.S. tariffs remains a significant concern.
U.S. Policy Rates: A slight reduction in U.S. interest rates to 4.0% is forecasted as the economy is expected to decelerate modestly. Inflation is projected to stay above the 2% target, complicating the economic landscape.
Currency Dynamics: The diverging economic outlooks between Canada and the U.S., along with the looming tariff risks, are likely to exert pressure on the Canadian dollar relative to the U.S. dollar.
Chart 1 - Canada and U.S. Headline InflationThis chart compares the headline inflation rates of Canada and the United States from 2018 through 2024. Here’s a breakdown of its key elements:
Lines Representing Inflation Rates:
- The blue line represents Canada’s headline inflation rate over the years.
- The green line represents the U.S. headline inflation rate over the same period.
Inflation Control Band:
- The shaded green area indicates the inflation control band set by the Bank of Canada, ranging from 1% to 3%. This band is where the Bank of Canada aims to maintain inflation to ensure economic stability.
Trends and Peaks:
- Both lines show significant peaks around 2021 and a sharp decline afterward, reflecting global economic conditions influenced by factors such as the COVID-19 pandemic and subsequent recovery phases.
- By 2024, Canadian inflation has dropped to within the control band at approximately 1.9%, showing effective control towards the target. The U.S. inflation also shows a decrease but remains slightly above the higher end of Canada’s control band at about 2.7%.
2025 Market Outlook:
- Equity Markets: Looking ahead, we expect equity markets to experience upward movement but with more subdued gains compared to the explosive growth of the past two years. Volatility is likely to increase, including potential market pullbacks. The S&P 500 is projected to reach 6,375, valuing EPS at 23.5x US$270, with favorable outlooks for sectors like Technology, Industrials, and Health Care. The TSX Composite is forecasted to hit 26,300 by year-end, translating to an 8.5% total return.
- Sector Rotation: 2025 might witness significant rotation in equity markets as previously overlooked small and mid-cap stocks, now showing positive earnings growth, attract greater investor interest. While the dominance of the ‘Magnificent 7’ is expected to persist, the broader benefits of AI should extend to smaller enterprises capable of leveraging technological advancements.
- Geopolitical Factors: U.S. markets are predicted to remain a relatively safer bet due to robust economic conditions and minimal tariff impacts. Canadian markets could face volatility pending tariff developments or new trade agreements. The performance of commodities like crude oil and gold will continue to influence Canadian market dynamics. Internationally, markets may be weaker overall due to ongoing trade uncertainties, although there are pockets of potential outperformance in select regions.
Chart 2 - S&P/TSX Composite and S&P 500 2024 PerformanceThis chart tracks the performance of major stock market indices in Canada and the U.S. through the year 2024, specifically focusing on the S&P/TSX Composite Index and the S&P 500 Index. Here are the details:
Lines Representing Market Indices:
The dark blue line represents the S&P/TSX Composite Index, a benchmark for the Canadian stock market. The light blue line represents the S&P 500 Index, a benchmark for the U.S. stock market.
AimStar Insights Summary:
As we embrace the new year, it is customary for us at AimStar to reflect on the past and project into the future. This executive summary provides a concise overview of last year’s economic landscape and outlines our expectations for 2025. The following pages will delve deeper into our analysis across various metrics, highlighted by several key themes:
- Economic Growth Prospects: The U.S. economy is expected to maintain its robust expansion, though we anticipate a slight slowdown to 2.4% in 2025, down from 2.8% in 2024. In Canada, the economy appears set for a rebound, with growth projected to rise to 2.0% from 1.2%. This improvement stems from the aggressive monetary policy easing, though this is tempered by the potential headwinds from ongoing tariff negotiations.
- Impact of Tariffs: Tariffs are poised to be a significant economic lever in 2025. The U.S. administration, under President Trump, has shown a clear favor for using tariffs to achieve various policy goals. The Canadian political landscape, particularly with the prorogation of Parliament and looming elections, adds complexity to any negotiations that might mitigate the impacts of tariffs. The potential inclusion of the energy sector in these tariffs could adversely affect U.S. inflation and consumer spending. It is critical to recognize that political actions may not always align with economic rationality, nor can leniency be expected as Canada navigates its political challenges.
- Stock Market Outlook: While we remain optimistic about the stock market’s potential for gains in 2025, the explosive returns exceeding 20% seen in the last two years are unlikely to continue. Investors should brace for increased volatility and possible market corrections, as price-to-earnings ratios are currently stretched, and many stocks may be overvalued under the assumption of continued optimal conditions. It is conceivable that some companies may surpass earnings expectations, which could sustain their high valuations; however, there is also a risk of performance falling short of inflated expectations, potentially leading to more normalized valuation levels.
FEBRUARY 01, 2025 | PUBLISHED BY AimStar Capital Group Inc.
AimStar Capital Group Inc. is a Canadian full-service Investment Dealer, regulated by Canadian Investment Regulatory Organization (CIRO) and a member of Canadian Investor Protection Fund (CIPF). As an independent firm, AimStar is built on a foundation of innovation, integrity, and client-centricity. They are committed to providing unbiased advice and dedicated to the client’s needs, helping them achieve their financial goals.
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