Seemingly underwhelming Canadian economic data has attracted attention recently, but we think there are key nuances beneath the headlines. We discuss the state of the Canadian economy and equity market in more detail below, alongside the ever-evolving geopolitical backdrop.

Geopolitics: Awaiting Confirmation

U.S. President Trump’s repeated assertions that a deal with Iran to reopen the Strait of Hormuz is “largely negotiated” have yet to produce a signed agreement. Prior to the conflict, the Strait facilitated roughly one-fifth of global oil shipments, and its continued closure has kept energy prices elevated. While the world economy has thus far demonstrated resilience, sustained commodity supply disruptions remain a significant risk to growth and inflation.

Against this backdrop, equity markets have recovered from their March correction and advanced further on the back of healthy corporate earnings and optimism of an eventual U.S.-Iran deal. Fixed income markets, however, have been more cautious. Bond yields remain well above where they started the year as markets consider the possibility that the energy shock could keep inflation pressures firmer for longer.

We are encouraged by the durability of the economy and corporate profitability but also recognize that recent gains in risk assets appear to reflect a high level of confidence regarding the timing of a U.S.-Iran deal. A finalized agreement that restores transit through the Strait may be needed to extend upward momentum. More importantly, it should help lower energy prices, ease inflation worries and create scope for bond yields to move lower.

Canadian Economy: Better Than the Headline

Canada’s latest GDP report generated headlines after economic output slipped 0.1% annualized in the first quarter, well below expectations and marking a second consecutive quarterly decline. While this met the common definition of a “technical recession,” we believe the underlying details were not as weak as implied by the headline figure.

Much of the downside surprise reflected a pullback in government defence spending after strong outlays in 2025. Business investment remained soft, but investment in equipment and intellectual property posted gains. Household spending continued to grow, suggesting resilient consumer demand. Demographic trends also make the data harder to interpret. Canada’s population fell for a second consecutive quarter as immigration slowed, meaning total economic output can understate underlying performance. In fact, real GDP per person rose 0.9% annualized during the quarter.

Overall, the report points to a sluggish and uneven economy, but not one experiencing a significant broad-based slowdown. Recent business surveys similarly indicate activity is expanding modestly, even as companies continue to navigate uncertainty and rising costs.

Trade policy remains the key near-term risk. Our expectation is that the trade terms in the CUSMA treaty will remain broadly intact, but the review process is likely to bring unsettling headlines. The recently proposed 10% U.S. tariff illustrates how even limited measures can create complexity and weigh on business sentiment, even if CUSMA-compliant goods are likely to be exempt.

Banks Lead Canadian Earnings

Canada’s big banks kicked off Q2 earnings season with results that generally exceeded expectations. Strong equity markets, improving dealmaking and elevated trading activity helped drive healthy revenue and profit growth and offset softness in consumer lending.

Despite favourable earnings reports, share price reactions were mixed. Part of the explanation may lie in valuation. Following a period of strong performance, Canadian banks’ valuations sit meaningfully above long-term averages, leaving less room for positive surprises to be rewarded.

Takeaways

Global risk assets continue to show resilience in the face of challenging crosscurrents. The Middle East conflict remains unresolved, while trade uncertainty continues to cloud the outlook for many Canadian businesses.

Reassuringly, corporate earnings are providing important fundamental support for equity markets, a reminder that macroeconomic trends and markets can diverge at times.

Uncertainty can be unsettling, but the central discipline of diversifying portfolios across sectors and asset classes remains a useful approach to withstand a wide range of market outcomes.

Should you have any questions, please feel free to reach out.

David W. Blair