The year ahead: 2025

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TD Asset Management finds the clouds may already be parting on the Canadian market outlook, with traditional growth drivers a source of upside once more

THE GLOBAL ECONOMY succeeded in making a “soft landing” in 2024, according to David Sykes, senior vice president, TD Bank Group, although he does find some countries stuck that landing better than others. To the surprise of many, US equity markets rose at breakneck speed and never looked back after Donald Trump won the US presidential election. Expectations that the US Congress’s “red wave” (the broad support for the Republican party) would be good for business outweighed concerns of renewed tariff wars. Policies are expected to come fast and furious in 2025, including changes to immigration policy, regulations, and taxes, combined with the overlay of tariffs that will no longer be reserved only as a tool to address trade irritants on goods and services. Fortunately, both the US and Canadian economies exited 2024 in a stronger position than expected. As such, TD Economics’ forecasts were set to be revised higher for 2025, but this was not done due to tariff risks as well as a tightening US labour force. Likewise, areas that could become growth-enhancers, like corporate tax changes, are not incorporated into their forecasts in the absence of specific guidance from the US Congress, which holds the purse on these decisions. That leaves some upside risk to the economic outlook.

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Even with an expectation that Canada will absorb some tariffs from the US administration, economic momentum in combination with lower interest rates should help it gain a step to1.7 percent economic growth in 2025

david sykes, td bank group, td asset management

The US economy remains the envy of its peers, on track to grow by a healthy 2.7 percent in 2024. At the same time, inflation has cooled and the job market has softened slightly. An unemployment rate of 4.2 percent is bang-on the US Federal Reserve’s long-run trend estimate. The incoming administration in Washington has inherited a solid economic backdrop, and President-elect Trump will presumably have every desire to keep the economy and stock market humming. This suggests some incentive to curb the most extreme policies proposed on the campaign trail, but there will likely be follow-through on priorities related to border control and tariffs. Overseas, Europe’s economic outlook has dimmed relative to last quarter, as the forecasted improvement in the latter half of 2024 did not materialize. Lower inflation has boosted real incomes, but consumers are still reluctant to spend. Now, we are layering on a potential hit from some US tariffs on European exports. Fiscal policy is also a wildcard in Europe as challenges balancing the budget have toppled the prime minister in France. Conversely, Germany’s economic malaise could improve next year if a new government loosens borrowing rules.

Looking forward to 2025, the combination of potential extensions of the first Trump administration’s tax cuts enacted in 2017, with a lowering of the US corporate tax rate and significant deregulation, could all drive positive earnings growth for US companies. In the view of the TD Wealth Asset Allocation Committee (the WAAC), this growth could be in the 12 to 15 percent range. We are cautious, however, due not only to persistent geopolitical instability but also to elevated stock valuations, particularly in the US, where the average forward price-to-earnings multiples remain elevated by historical comparison.

At the close of 2024, the US economy was forecast to slow to a still-solid two percent in 2025. This is not due to expectations regarding the new administration’s policies but, rather, a reflection of the natural business cycle’s path toward normalization. Excluding the COVID-19 pandemic, which was not a market-driven event, the US is amid the longest expansion in history, suggesting at best an economy at mid-cycle. This creates a natural gravitational pull back to its sustainable trend pace, particularly after a long period of restrictive interest rates. In Canada, the economy has faced significant challenges over the past couple of years, with high interest rates weighing heavily on a highly leveraged household. However, the clouds may already be parting. Canada’s traditional growth-drivers, the consumer and housing, are once again a source of upside momentum to the economy. Even with an expectation that Canada will absorb some tariffs from the US administration, economic momentum in combination with lower interest rates should help it gain a step to 1.7 percent economic growth in 2025, versus a tepid 1.3 percent in 2024. Canada’s forecast will materially depend on how successful it will be at managing its relationship with the incoming Trump administration. Even if only a 10 percent blanket tariff is imposed on Canada, a period of extended stagnation would be expected over the next two years. Due to the energy-heavy nature of Canada-US trade, we expect Canada will avoid the full 25 percent tariff, but the constant threat of tariffs could be enough to send a chill through businesses considering investing in domestic capacity.

We are optimistic about North American equities entering 2025, as we expect positive earnings growth to continue to drive attractive relative returns over the medium term. While the US market had a strong 2024, equity returns were broadly positive across many geographies and sectors. Earnings growth (as represented by the MSCI All Country World Index) has been partially captured by the market in valuations, and we believe current valuations are justified given the backdrop of modest economic growth. Low-to-mid single-digit total returns expected for Canadian bonds With the Bank of Canada (BoC) policy rate now lowered to the top end of its estimated neutral range, additional rate cuts are expected to be delivered carefully in order for the BoC to maintain flexibility to respond to a wide array of domestic or international macroeconomic and political uncertainties. Given the extent to which the Canadian bond market has outperformed other bond markets over the past two years, we expect only modest low-to-mid single-digit total returns over the next 12 to 18 months. Nevertheless, against a backdrop of continued monetary policy easing, we expect that bonds will continue to provide stable income and preserve capital.

Given the extent to which the Canadian bond market has outperformed other bond markets over the past two years, we expect only modest low-to-midsingle-digit total returns over the next 12 to 18 months

We believe that an allocation to alternative assets can benefit diversified portfolios, especially when implemented over the long term. Alternative assets can provide inflation protection and attractive absolute returns, while acting as long-term portfolio stabilizers via their diversification benefits and less-correlated income streams. Given the nature of private asset classes as well as the present phase of value adjustment in several markets and asset classes, we believe that this may be an attractive time to increase or consider an allocation to alternative assets.

On the commodities front, gold delivered solid gains in 2024 due to continued demand from central banks and investors. Investor demand could shift depending on the geopolitical environment and risk appetite. Gold has recently faced a headwind from US long-term real yields, which have rebounded despite the Fed’s rate cuts. Metals prices have been subdued and at this point the announced Chinese stimulus measures appear unlikely to improve demand significantly. Oil has been range-bound, but the Organization of the Petroleum Exporting Countries (OPEC+) continues to support the market with its recent decision to delay supply increases. Best wishes for 2025.

The year ahead – economic outlook

Optimistic outlook for equities in 2025

Published January 27, 2025

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THE Year in review

The global economy achieved a “soft landing” in 2024, although some countries stuck the landing better than others. To the surprise of many, US equity markets rose at breakneck speed, and never looked back after Donald Trump won the US election

We are optimistic about North American equities, as we expect positive earnings growth to continue to drive attractive relative returns over the medium-term

THE Year ahead: economic outlook

Positive outlook for alternatives in 2025

Balanced outlook for commodities in 2025

david sykes, td bank group, td asset management

1 Aggregate statistics as of Sep 30, 2024 for TD Asset Management Inc. and Epoch Investment Partners, Inc.

Both the US and Canadian economies exited 2024 in a stronger position than expected. As such, TD Economics’ forecasts were set to be revised higher for 2025, but that was reversed due to tariff risks as well as a tightening US labour force

Overseas, Europe’s economic outlook has dimmed relative to last quarter, as the forecasted improvement in the latter half of 2024 did not materialize. Lower inflation has boosted real incomes, but consumers are still reluctant to spend

THE Year in review

Given the extent to which the Canadian bond market has outperformed other bond markets over the past two years, we expect only low-to-mid single-digit total returns over the next 12 to 18 months

Given the nature of private asset classes as well as the present phase of value adjustment in several markets and asset classes, we believe that this may be an attractive time to increase or consider an allocation to alternative assets

We are optimistic about North American equities, as we expect positive earnings growth to continue to drive attractive relative returns over the medium-term

THE Year ahead:economic outlook