Market outlook: Third quarter 2025

30 May 2025 by National Bank Investments

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In its first 100 days, the U.S. Administration triggered economic shifts with reciprocal tariffs, raising bond rates and depreciating the dollar—unexpected moves in uncertain times. Overall, there has been sharp market reaction forcing a reprieve for said tariffs and suspension of escalation with China. Are there potentially more headwinds ahead for investors?

AlphaFixe Capital (“AlphaFixe”), portfolio sub-advisor of the NBI Sustainable Canadian Bond strategy provides an overview of the latest quarter and shares what investors can look for when protecting their portfolio.

Read the portfolio manager’s comments for this strategy included in certain NBI Portfolios and NBI Private Wealth Management profiles.

Outlook and Challenges

This economic situation complicates the Federal Reserve's (the “Fed”) efforts, heightening stagflation risks. While tariffs have not immediately driven inflation due to stockpiling, their eventual impact could amplify price pressures. The Fed remains cautious but unlikely to tighten monetary policy, viewing tariff effects as temporary.

The U.S. administration has postponed its rebalancing plan to focus on passing an expansionary budget in Congress. If successful, renewed trade conflict rhetoric could disrupt markets again. While recession risks remain low, economic activity is expected to slow as businesses and households seek clarity before committing to new projects. In Canada, the trade conflict is expected to hinder growth rather than fuel inflation, allowing the Bank of Canada to maintain its easing stance.

Investment Opportunities

Given the high macroeconomic and geopolitical risks so far this year, excessive risk-taking, for investors, is discouraged. Developing a fundamental investment strategy becomes challenging when a simple social media message can cause drastic shifts. Interest rates have oscillated within a relatively narrow range over the year. With the suspension of tariffs, the risk of recession in the U.S. diminishes, but a significant slowdown in activity could lead to a drop in bond rates. Conversely, tariff inflation and the budgetary challenges facing the U.S. administration could prompt investors to increase the risk premium related to the rising public debt. This risk would be exacerbated if trade tensions reduce foreign capital used to finance this debt. In either case, the market could offer investment opportunities if rates become temporarily overvalued or undervalued.

Regarding credit bonds, yield premiums initially widened in the weeks following Liberation Day, then narrowed after a significant reduction in tariffs imposed on China. At their current levels, these premiums offer little protection in such uncertain conditions. We prefer to wait for a more sustained widening before increasing exposure to corporate bonds in portfolios. Conversely, provincial bonds present a relatively attractive risk-return ratio. In summary, it is better to wait until asset valuations reflect greater uncertainty before increasing risk-taking in portfolios.

The strategy

Active management at AlphaFixe Capital is based on five distinct sources of added value derived from our fundamental analysis of long-term economic conditions. This management is nonetheless constrained by a risk budget that forces us to prioritize investments offering the best risk-reward balance. In the current context, we believe it is better to wait for better entry points in certain strategies before taking on additional risk. This strategy also emphasizes debt securities that finance projects or businesses with positive environmental or social impact.

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