A lot has happened during Trump’s first 100 days in office and we now find ourselves in an uncertain environment with respect to tariffs and trade policy. Despite a hopeful outlook from market participants for concessions or further extension, as of March 4th, President Trump has imposed tariffs on Canada and Mexico to the tune of 25% (Canadian Energy products are subject to a lower tariff of 10%). Canada was quick to introduce retaliatory measures and just yesterday (March 6th), tariffs related to imports of USMCA goods have been delayed until April 2nd. Global equity markets have experienced big swings in volatility and further tariffs have already been announced. Next up are steel and aluminum, each at 25% (effective March 12th). Trump’s plan for reciprocal tariffs is also expected to take effect on April 2nd.

The question we have for investors is, what's next? The market is showing some strength on the reprieve announcements; however, we believe the risks of a long lasting trade war have increased and more caution is warranted. In this special edition of the Pinnacle, we discuss our Canadian equity market views, and where suitable, the reallocation we are making to reduce Canadian equity exposure in client portfolios.

Why reduce Canadian Equities?

• The Canadian-U.S. trade relationship represents significant importance on both sides of the border, but Canada relies more heavily on the U.S. Trade between the two countries accounts for over 75% of total Canadian goods exported and over 60% of Canada’s imports. Exports to the U.S. were responsible for roughly 19% of Canadian GDP in 2023. The U.S. is the export destination for at least 55% of goods for every province (except Newfoundland and Labrador at 35%). Canada is the largest export destination for U.S. goods (18%), followed by Mexico (16%) and China (7%).
• Trade uncertainty remains an ongoing risk. We expect that tariffs will be higher on Canadian goods crossing the U.S. border by the end of 2025 than they were at the start of this year. This will have an impact on the Canadian economy, even if the current tariffs are temporary.
• We anticipate that the duration of tariffs will be closely correlated to the level of accommodation provided from the Bank of Canada. Financial relief is expected by way of lower policy interest rates, with the objective of stimulating the Canadian economy. Lower interest rates may ignite economic growth and help financial markets; however, a prorogued Government lacks the ability to provide targeted stimulus aimed at supporting areas of the economy most impacted by tariffs.
• A shaky economic growth environment in Canada is compounded by sustained struggle with productivity. Prior to a marginal uptick (+0.2%) in Q4 2024, GDP per capita declined for six straight quarters. Canadian per capita GDP declined by 1.4% in 2024 (following a decline of 1.3% in 2023). Further, tighter immigration policy is expected to put strain on future economic growth.
• Canada continues to face a household debt problem, with a wall of mortgage refinancings approaching later this year and into 2026. Uncertainty will weigh on Canadians looking to enter the housing market as any permanence of tariffs could result in higher levels of Canadian unemployment.
• U.S. trade figures released on February 28th show that the U.S. had an international trade deficit of $153.3 billion in the month of January – a whopping $31.2 billion increase from the month before. This suggests that an increase in economic activity was driven by U.S. businesses front-running purchases in advance of upcoming tariffs, which is expected to taper in the quarter(s) ahead.
• We expect lower corporate earnings revisions to begin in Q1 2025 (in both Canada and the U.S.), as tariffs will put downward pressure on forward 12-months earnings per share growth (a key input for business profitability, investor sentiment, and stock market performance).

It is important to keep in mind that the composition of the Canadian economy is different from that of the Canadian equity market. While the tariff situation is very fluid and could have a material negative impact on the Canadian economy, individual companies and sectors will experience different outcomes. Additionally, the Canadian equity market trades at a significant valuation discount relative to the broader U.S. large-capitalization index. For these reasons, we continue to hold a meaningful allocation to Canadian equities, but feel it is prudent to reduce overall exposure.

The Canadian equity market is near all-time highs and is flat in 2025, and therefore, we believe now is an opportune time to take profits and maintain a more conservative approach. Proceeds will be invested in a very conservative and short-term Government security, allowing us to remain flexible and opportunistic.

We expect the market will continue to experience a higher level of volatility given current policy and implementation uncertainty. We plan to take advantage of market dislocations and opportunities as they emerge and will adjust portfolio positioning accordingly.