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Investment update Q1 2025

Market performance

The S&P 500, the Nasdaq and Canada’s TSX all hit record highs in the first quarter, but tariff and trade-related volatility plunged equity markets to pandemic-level losses, outweighing short-term gains.

Despite being one of the main countries targeted by U.S. President Donald Trump’s sweeping tariffs and restrictive trade policies, Canada’s benchmark stock index, the TSX, outperformed its U.S. counterparts, ending Q1 almost flat. Gold was a big reason why as investors flocked to safe-haven assets amid the tariffs and reciprocal tariffs between the U.S. and its international trade partners. Lighter exposure to the tech sector also benefitted the TSX.

The S&P 500 and the Nasdaq had their worst quarterly performance since 2022, falling 4.6% and 10.5%, respectively. The widespread uncertainty brought on by the Trump administration, which briefly spurred market optimism for its perceived pro-business approach, instead raised fear of an economic slowdown that hit the tech sector hard in Q1. Six of the Magnificent Seven group of stocks underperformed through the quarter with shares of Nvidia and Tesla faring the worst, down 20% and 35%, respectively. The ascent of DeepSeek, China’s low-cost AI startup, also rattled the tech market in late January, leading the Nasdaq and the S&P 500 to significant daily losses.

U.S. economic data showed that consumer spending slowed in January for the first time in two years. The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, increased 2.8% in February, up from 2.6% in January, and higher than the 2.7% analysts expected.

For Canadian investors, the quarter got off to a somewhat unexpected start when Justin Trudeau announced his plan to step down as Prime Minister on January 6. The Bank of Canada also made domestic headlines with consecutive 25-basis point interest-rate cuts in January and March. Governor Tiff Macklem highlighted that the bank’s interest-rate cuts have boosted consumer spending, while job growth has remained strong and inflation has stayed close to the bank’s 2% target. With its March reduction, the bank aimed to maintain some of that momentum as Canada navigates the unprecedented trade war with President Trump. Macklem told reporters: "Looking ahead, the trade conflict with the United States can be expected to weigh on economic activity, while also increasing prices and inflation.”

The stock and bond markets*

Index Close Q1
S&P/TSX Composite 24,917.50 0.77%
Dow Jones Industrial Average 42,001.76 -1.28%
S&P 500 Index 5,611.85 -4.59%
NASDAQ Composite 17,299.29 -10.42%
10-year Canadian Bond Yield 2.97% -0.26%
10-year U.S. Treasury Yield 4.23% -0.35%
WTI Crude Oil (US$/barrel) $71.48 -0.33%
Canadian Dollar US$0.6950 -0.03%
Bank of Canada Prime Rate 4.95%

*Performance ending March 31, 2025. Sources: Bloomberg.

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The Investment Analyst team at Co-operators provides expert economic insight, portfolio construction and recommendations to support our wealth management services. Read their insights on the major factors that impacted markets as Q1 came to a close.

Equity markets

Canadian equities faced a challenging environment in March 2025, with the TSX declining 1.87%. The tepid performance was largely driven by the escalating trade tension between the U.S. and Canada. The tariffs announced by Donald Trump on Canadian imports sparked investor concerns over inflationary pressures and economic slowdown. A potential uptick in unemployment, which has increased the odds for a Bank of Canada interest-rate cut, also added to economic downturn concerns. This uncertainty weighed on sentiment and drove broad-based market volatility.

The materials sector stood out as a bright spot, with performance largely supported by gold prices that boosted mining and mineral stocks in Canada – a sector well represented on the TSX. The energy sector also performed well, driven by increased demand. The sharpest declines were observed in the technology and health care sectors.

The S&P/TSX Small Cap Index delivered a positive return of 2.24%, defying the broader market trend. Small cap companies, which tend to have more domestic orientation, were perceived as relatively insulated from global trade disputes. This allowed them to benefit from investor rotation away from internationally exposed large cap companies towards more locally-focused businesses. This move was further supported by the outlook for lower interest rates in Canada.

From an investment management perspective, growth stocks lagged value stocks. In uncertain environments, investors often rotate into value-oriented companies – typically those with stronger free cashflows and more defensive characteristics – as they seek stability. This shift was evident in March, reinforcing the market’s risk-off tone.

Fixed income

The Canadian fixed income market experienced notable movements influenced by domestic monetary policy decisions and escalating international trade tension in the final month of the quarter.

The 2-year Government of Canada bond yield declined by 11 basis points in March, partially in response to a 25-basis point rate cut delivered by the Bank of Canada. This movement also reflected investor expectations of continued accommodative monetary policy from the Bank of Canada to support the economy amid the ongoing trade war. Conversely, the 10-year Government of Canada bond yield increased by 7 basis points over March. The contrasting movements between short and long-term yields resulted in a steepening of the yield curve, suggesting there’s potential for higher inflation.

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