Despite the continued resilience of equity markets to start the year, headline-driven uncertainty has intensified over the past month, with technology, tariffs and geopolitical tensions in focus. Below, we break down these themes and their implications for your portfolio.

Company Profits Remain Strong

The largest U.S. and Canadian companies have finished reporting their year-end results. Overall, fundamentals remain strong as corporate profits have grown at a double-digit pace for five quarters in a row and most companies remain on solid financial footing. 

However, we’re starting to see a shift in how investors are reacting to the news.  It is no longer enough for companies to say they are investing in AI; investors now want to see exactly how that spending is turning into real profit.  We recently saw a major AI player report phenomenal numbers and raise their profit forecast, yet the stock price reaction was muted. This tells us that current expectations are very high and the market is becoming more sensitive to disappointments. 

Software Sector Volatility

The software industry, which represents roughly a third of the technology sector in the U.S. Index, has become a primary source of volatility in the markets. Investors are grappling with a fundamental shift in how software is sold.  The traditional "per-seat" subscription model has provided predictable revenue for decades, but we're now entering an era of "Agentic AI":

• The “seat collapse”: if a single AI does the work of 10 employees, companies only need to pay for 1 seat instead of 10.
• The shift to “outcome-based pricing”: the industry must adapt to a “per-success” pricing model. This is where customers pay for a specific result – such as a resolved ticket – rather than just access to a ticketing tool.

While recent selling pressure appears more sentiment-driven than fundamental, it will take time for software companies to restore investor confidence in the long-term resilience of their businesses – and their new business models.  We remain constructive on the AI theme over the long term but recognize that transformative technologies often bring periods of volatility and elevated uncertainty. In your portfolio, active management within the technology sector is more important than before.

More Tariff Developments

The legal landscape regarding U.S. trade policy significantly shifted this month following a Supreme Court ruling that struck down certain prior tariffs imposed by the Trump administration under the International Emergency Economic Powers Act (IEEPA). The market reaction was largely muted as investors had anticipated both the ruling and efforts by the administration to reinstate tariffs through alternative legislations.

The response from the Trump Administration was a new 10% global tariff on U.S. imports that came into effect last week, with the White House indicating they could increase to 15% "where appropriate".  Implemented under Section 122, these levies can remain in place for 150 days without Congressional approval, but they are also likely to face legal challenges.  Given the current composition of Congress, a vote to extend the tariffs appears unlikely, but the temporary measure provides time for the administration to restructure its tariff policy.

For Canada, the immediate economic impact remains limited. Roughly 90% of Canadian exports to the U.S. continue to flow tariff-free under USMCA exemptions, while sectoral tariffs on metals, autos, and other targeted parts remain in effect. The scheduled USMCA review in July remains consequential for Canada’s economic outlook, alongside ongoing efforts to diversify trade and invest in domestic capacity. We are monitoring developments on these fronts closely.

Conflict in the Middle East

Global attention shifted to the sudden escalation of military conflict between the US, Israel and Iran. The immediate market impact has been felt primarily through energy prices and increased volatility. Energy prices surged over 10% in the initial hours of the conflict, reflecting concerns over potential disruptions to the Strait of Hormuz – a critical chokepoint as nearly 20% of the world’s oil and LNG moves through the Strait daily.

It is important to distinguish between short-term headline risk and long-term economic shifts. While geopolitical events trigger “flight to safety” behavior, the fundamental driver for your portfolio remains the health of the broader global economy and corporate earnings. Your portfolio is already invested in high quality companies with durable balance sheets, which tend to outperform during times of distress. We are monitoring developments closely but are not making reactive changes to your long-term strategy.

Key Takeaway

While markets are susceptible to shifts in sentiment, policy uncertainty and escalating geopolitical tensions; we feel cautiously optimistic as the economy is steady and businesses are doing well. We believe maintaining a cautious yet invested market-weight stance in portfolios, while focusing on the long term, remains sensible.