^InsightsMonthly Market Wrap – March 2025

As the first quarter of 2025 came to a close, global markets were rattled by a surge in protectionist policy out of Washington, the reverberations of which were felt across equities, fixed income markets, and economies around the world. What started as a resilient year quickly turned into a cautionary tale of how geopolitics and economic fragility can upend market sentiment.

Let’s unpack what happened in March, across three core areas: equity markets, fixed income, and macroeconomics.

Equity Markets: A Cautionary Turn

After showing relative strength early in the year, equity markets reversed course sharply in March as the threat of a broadening U.S.-led trade war intensified. The MSCI All Country World Index fell 4.64% on the month, led lower by U.S. equities, which bore the brunt of escalating tariff rhetoric.

U.S. Markets: Trade Risks Begin to Bite

The S&P 500 slid 5.75% in March alone and is now down 4.59% on the year. The catalyst? A sharp pivot toward aggressive trade protectionism from the U.S. government. The current effective U.S. tariff rate now stands at 7%—the highest since World War II. If proposed additional tariffs are implemented, that number could jump to 15%, levels not seen since the 1930s.

While the administration downplays the risk—highlighting that exports account for just 11% of U.S. GDP—markets tell a different story. Roughly 41% of S&P 500 revenues are generated overseas, and sectors like Information Technology (where nearly 60% of sales come from outside the U.S.) are particularly exposed.

It’s no surprise, then, that tech was hit hard, falling 14.5% since its February peak. Consumer Discretionary and Communication Services weren’t far behind, with losses exceeding 10%. Energy was the lone S&P 500 sector in positive territory during this stretch, supported by resilient oil prices.

Canada: Holding On—Barely

Canadian equities were not immune. The S&P/TSX Composite declined 1.87% in March, wiping out nearly all year-to-date gains. As of month-end, the index was flat on the year, up just 0.77%.

Sector divergence was stark. Materials, Energy, and Utilities managed positive performance, buoyed by a historic surge in gold prices, which surpassed US$3,000 per ounce in both nominal and inflation-adjusted terms. Materials rose 6.4% in March and are now up over 19% YTD.

In contrast, Technology, Industrials, and Financials were notable laggards. The TSX’s IT sector dropped 12.3% in March, while Financials—especially Canadian banks—slid 5.0%, reflecting rising economic uncertainty and an increasingly defensive investor stance.

Emerging Markets: A Bright Spot

Interestingly, Emerging Markets (EM) equities held up relatively well. The MSCI EM Index rose 1.7% in March and is now up 3.9% YTD. Latin America and EMEA led the charge, aided by currency tailwinds, commodity strength, and relatively low direct exposure to U.S.-centric trade frictions.

Fixed Income: Shifting Toward Safety

The flight to safety that began in February accelerated in March. Bond markets benefited from risk-off sentiment, and central bank policy paths have once again come under scrutiny.

Canada: Easing Bias Holds

The Bank of Canada has already cut rates by 225 basis points since June 2024, bringing the policy rate to 2.75% as of March. While the strong Q4 GDP print (2.6% annualized) and early-2025 data have been encouraging, the bank remains in a delicate position.

Short-term rates are expected to continue falling in the coming months. Forecasts suggest an overnight rate of 2.00% by the end of 2025, with the yield curve flattening accordingly:

• 2-year: 2.05%
• 5-year: 2.25%
• 10-year: 2.65%

This easing outlook reflects expectations of a notable economic slowdown in H2 2025 as tariff-related uncertainty drags on business investment and consumer confidence.

U.S.: Mixed Signals

In the U.S., fixed income markets are caught between conflicting signals. On the one hand, inflation expectations have surged—medium-term consumer inflation expectations hit a 32-year high of 4.1% in March.

On the other, the Atlanta Fed’s GDP Now model estimates Q1 GDP contraction of -2.8%, the weakest reading (outside of the COVID crisis) since the model’s inception.

Yields dropped across the curve as investors hedged against economic deterioration. However, stickier inflation readings may limit the Fed’s ability to cut aggressively in the near term. This sets the stage for stagflation-like dynamics—high inflation, low growth—which tend to challenge both equity and bond investors.

Economics: Growth Divergence and Growing Pains

March offered a stark illustration of divergence between the Canadian and U.S. economies—at least in the short term.

Canada: Strong Start, But Trouble Ahead

Canada’s economy surprised to the upside in Q4 2024 and early 2025, thanks to a combination of interest rate relief, strong consumption, and a front-loading of exports to the U.S. ahead of potential tariffs.

• GDP growth: 2.6% annualized in Q4 (vs. 1.7% expected)
• Consumption growth: 5.6%, aided by improved disposable income and lower debt service costs
• Investment rebound: Machinery & equipment investment and residential activity turned positive

However, the sustainability of this recovery is under question. Consumer confidence hit an all-time low in February, reflecting widespread concerns about job security and major purchases. The housing market is softening again—home sales in Ontario dropped 20.2% in February, with the GTA down 29%.

Youth unemployment reached 19.2% (3-month average) in Toronto, and SME business confidence has plummeted. Hiring intentions across sectors have turned negative for the first time since the pandemic.

Overall, National Bank expects GDP growth of just 1.2% in 2025, with the unemployment rate rising into the 7.0–7.5% range in the coming months. Further monetary easing is likely, which could provide some cushion heading into a difficult summer.

U.S.: Warning Lights Flashing

While Canada enjoys a temporary boost, the U.S. economy appears to be sliding toward contraction. Aggressive protectionist measures, tighter immigration controls, and continued fiscal spending have created an environment of elevated inflation and declining purchasing power.

Consumer sentiment has cratered. The University of Michigan survey recorded the worst balance of opinion on purchasing power improvement in its history—even worse than during the high-inflation era of the 1980s.

Meanwhile, expectations for S&P 500 earnings remain oddly optimistic, with consensus forecasting 11% EPS growth in 2025. This appears increasingly at odds with weakening economic signals, tariff disruptions, and deteriorating sentiment.

Final Thoughts: Navigating Uncertainty

March marked a pivotal shift in market tone. The optimism of early 2025 has faded into caution, driven largely by trade tensions, rising inflation expectations, and signs of economic slowing on both sides of the border.

While Canada’s short-term data has been strong, its outlook is now clouded by external risks and domestic fragilities. In the U.S., stagflationary pressures may limit the effectiveness of policy responses—posing challenges for both equity and bond markets.

As always, diversification and quality remain key. Investors should remain alert to shifts in policy, inflation, and geopolitical developments while maintaining a balanced approach grounded in long-term fundamentals.