Market and Investment Outlook 2025 Q3

Q3 2025 delivered strong equity returns globally, but beneath the surface, the rally was unusually narrow and speculative. While investors focused on anticipated rate cuts and improving inflation trends, market behaviour often diverged from economic fundamentals, creating one of the most polarized environments of the cycle.

A Quarter Defined by Speculation and Rate-Cut Expectations

The quarter was driven by growing conviction that major central banks were preparing to ease. Falling yields, stabilizing inflation, and resilient consumer trends in the U.S. supported a powerful risk-on tone. AI-related capital expenditure also played a growing role in sentiment, amplifying enthusiasm for anything tied to data centers, semiconductors, or automation. Yet key indicators—softening labour markets, uneven GDP trends, and rising consumer stress—suggest the real economy remains mixed. Much of the market’s strength reflected momentum and thematic excitement rather than broad-based fundamental improvement.

Canada and the U.S.: Extreme Divergence Within Small Caps

North American small caps outperformed large caps, but leadership was exceptionally narrow. In Canada, the TSX Small Cap Index rose over 20%, driven almost entirely by a historic surge in Materials as gold and silver rallied sharply. This created severe distortions, with junior miners, cannabis, crypto-linked equities, and AI-concept names dominating index returns. As for the U.S., approximately 89% of companies in our U.S. small-cap portfolio beat EPS expectations—yet valuation pressure persisted as capital flowed toward unprofitable tech, quantum computing concepts, and heavily shorted stocks. Fundamentals played a secondary role to speculative flows.

Global Markets: Powerful Rebound, Uneven Foundations

Global equities extended one of the strongest six-month rallies since major crisis recoveries. Asia benefited from easing conditions and renewed inflows, while Europe showed early signs of stabilization across chemicals, industrials, and select consumer sectors. Still, speculative behaviour often outpaced economic progress. The durability of this rally now depends on policy clarity, geopolitical outcomes, and the long-term payoff of AI-driven investment.

Quick Takeaways

• Rate-cut expectations, not broad economic strength, were the main driver of Q3 market performance.
• Canada experienced extreme sector distortion, with Materials up over 40% on gold and silver strength.
• U.S. small caps names in our portfolio saw strong earnings but were overshadowed by speculative tech and high-beta themes.
• Asia and Europe improved, but fundamentals remain uneven across regions.
• Market momentum remains sensitive to policy direction, geopolitics, and the sustainability of AI-related spending.