Market and Investment Outlook 2025 Q1

As we move through 2025, market conditions remain challenging but increasingly constructive for long-term investors. Tariff uncertainty, slowing economic activity and cautious corporate sentiment have led to volatility, yet small-cap valuations now present compelling opportunities.

Economic Backdrop: Volatility with Underlying Value

North American markets entered Q2 on the heels of one of the sharpest non-recessionary declines in recent history. Rising trade tensions, led by the Trump administration’s tariff policies, have weighed on sentiment and slowed capital spending and hiring. While the risk of a mild, self-inflicted recession has risen, much of this appears to be already reflected in market prices—particularly within the small-cap space.

Opportunities in Canadian and U.S. Small Caps

In Canada, small-cap stocks—excluding metals and mining—have corrected more than what is typical during early recessionary periods. As a result, further downside risk appears limited, and high-quality names are now available at deeply discounted valuations. Similarly, U.S. small caps have experienced a steeper-than-usual drawdown. We view this as a rare entry point for long-term compounding.

Potential Rewards for Investors Focused on Fundamentals

Looking ahead, we expect continued volatility in the near term as markets digest policy developments and macro uncertainty. However, history has shown that periods of elevated volatility can create strong long-term return opportunities—especially for investors focused on fundamentals. With interest rate cuts still expected later this year and inflationary pressures gradually easing, the backdrop for small caps should improve as the year unfolds.

Quick Takeaways

• Tariff uncertainty and slower economic activity have contributed to elevated market volatility across North America.
• Canadian and U.S. small caps have already corrected significantly, suggesting much of the recession risk is already priced in.
• Valuations are now compelling, offering a rare opportunity to invest in high-quality small-cap companies at meaningful discounts.
• Expected rate cuts and stabilizing inflation could support equity markets in the second half of 2025.
• We remain optimistic about the recovery potential for small caps and continue to monitor macro developments closely while staying focused on fundamentals.