What the 2025 market outlook for Canada and the U.S. could mean for your portfolio

Does the 2025 market outlook mirror 2024’s stellar performance? Canadian and U.S. equity markets had a remarkable year in 2024. For the full year, the U.S. market was up just over 36%, and the Canadian market was up a little over 22%. While these returns were driven by a variety of factors, the common factor was the more favourable interest rate environment.

Specific to the U.S., the resounding victory of Donald Trump appears to have given new life to the equity bull market. With an average return of just over 75%, the “Magnificent Seven” — Apple, Microsoft, Nvidia, Alphabet, Meta, Amazon and Tesla — continued to dominate. Here in Canada, the two largest sectors — financials and energy — each delivered strong returns of 30% and 24% respectively.

Canadian economic growth has continued to be surprisingly resilient over the past year. That said, the incoming U.S. administration has been talking about 25% tariffs on Canadian and Mexican goods Opens a new window.. Since exports make up one third of the Canadian economy, and almost 80% of our exports go to the U.S., if this comes to pass, it will have a severe impact on Canada. This is a very important development to monitor in the early months of 2025.

With central banks widely expected to continue on their path to lower policy rates, interest rates will once again be in focus Opens a new window.. Key to this will be the inflation data, as factors such as trade tariffs will act as a headwind to the battle against rising prices. The Magnificent Seven represent almost 31% of the weighting of the S&P 500, and any continuation or reversal of the strong momentum in these stocks will have an outsized impact on the performance of the U.S. market. This concentration in the benchmark has made it difficult for active managers to beat the market. History has shown that these imbalances do reverse, and having diversification in your portfolio can be a valuable hedge against extreme shocks in the value of your investments.

If you’re a conservative investor, an effective way to build resilience into your investment portfolio is to start with a plan that considers your time horizon and goals over the long term. So, if it’s to fund a retirement that’s 30 years in the future, a long-term plan that invests across asset classes, countries and sectors may be an appropriate asset allocation within your investment portfolio.

As we start 2025, bonds still have relatively attractive yields and could provide meaningful support in an equity market downturn, and so should also be considered as part of a diversified plan. While the yield on the 10-year government of Canada bond moved in a wide range over 2024 — from a low in the yield of 2.9% to a high of 3.9% — it does look like yields settled down in the last couple of months of the year. Returns were firmly in positive territory for the year.

For those investors especially concerned about risk, there are low volatility strategies that are designed to include stocks identified as having either lower expected beta — the extent to which a stock moves relative to the direction of the market — or lower expected standard deviation — how much the stock return varies around its average. Investors could also lean into stocks that have more defensive properties, like mature businesses with stable cash flow and less cyclicality, which is associated with higher dividend yield.

While there is reason for optimism with the 2025 market outlook, it’s hard to expect returns to continue being as strong as they have been. The U.S. market was up over 22% in 2023, and that was followed by even stronger returns in 2024. Even though it’s likely equity returns may come off the boil, so to speak, we still believe they’re very investable into the new year.

Bond markets also have a fairly nice setup for 2025. Yields are still relatively high versus 15-year averages, and central banks should continue to bring rates lower as inflation appears under control. At the end of the day, unlike at the end of 2023 when fears of recession were in the headlines, there’s more reason for optimism heading into the new year, and more than a few reasons to stay fully invested.

CIBC Asset Management is committed to providing market and investment insights. We want to help you find the right solutions to guide your investment journey. If you'd like to discuss this market update in more detail or have questions about your investment portfolio, please get in touch with your advisor or CIBC representative anytime. To learn more, visit CIBC Asset Management.