The past quarter demonstrated sustained investor confidence, driven by strong corporate profitability, geopolitical developments, and advances in artificial intelligence technology. These factors contributed to equity markets reaching record levels. Notably, the SpaceX initial public offering (IPO) entered the market at a valuation that was out of this world - 93 times sales. For context, the Canadian banks are trading at a valuation of approximately 14 times earnings. Looking ahead, additional IPOs from prominent artificial intelligence companies, including Anthropic and ChatGPT, are anticipated over the coming months. This suggests that investors are expecting the recent exceptional growth from artificial intelligence companies to continue over the long term. The sustainability of this growth trajectory should become evident over the next twelve to twenty-four months.

Interest Rates and the Economy

During the quarter, the new Chairman of the US Federal Reserve (the Fed), Kevin Warsh, took over from Jerome Powell. Kevin Warsh has indicated that he will be vigilant in trying to keep inflation under control and that the Fed will be providing a lot less communication moving forward – leaving market participants to figure out more on their own. Regarding interest rates, the recent decrease in oil prices will likely help reduce inflation, which should in turn reduce the need for interest rate increases. This can be observed in the market’s expectations of interest rate changes. Currently, there is one interest rate increase of 0.25% expected over the next twelve months – which is quite minimal.

Trade and Travel

The free trade agreement between Canada, the US and Mexico (CUSMA) was not renewed on July 1. This was not a surprise. However, this does not mean that the deal was terminated. The existing deal may remain in place for up to ten more years. For now, we have the status quo. However, we expect that the US will continue to demand concessions from Canada and the tariffs Canadians pay will likely increase over time. Across the world, the Japanese Yen has decreased to its weakest level versus the US dollar since 1986. This is in large part because of the differential in interest rates between the US and Japan (US interest rates are significantly higher than Japanese interest rates) and massive fiscal spending by the Japanese government. Over time, we expect Japanese interest rates to increase, which should narrow the gap. In the meantime, for those interested in travelling to Japan, now may be a good time as the dollar goes much further than it did a few years ago!

Leverage

With stock markets hitting all-time highs, there has been considerable discussion about the amount of money investors have been borrowing to invest in stocks. Over the past twelve months, margin debt—money borrowed specifically to purchase stocks—has increased by 50 percent. Additionally, over the past three months, investments in high-risk leveraged exchange-traded funds (ETFs)—investment funds that use borrowed money to amplify returns—have doubled.

When investors borrow money to invest, it amplifies both gains and losses. We expect this additional borrowing will likely increase stock market volatility (the ups and downs in prices). We do not use leveraged ETFs for speculation, and increased borrowing does not necessarily mean that markets will decline. However, we are cautioned, as generally, excessive borrowing to finance stocks purchases is a sign of greed, not fear.

Pearlstein Wealth Team

We are very excited for Carmen to welcome her second baby in a few months’ time! This summer, our summer student, Rylan, is helping with several projects. Lastly, we are hoping to announce the hiring of a new administrative associate in the next few months.

Wishing everyone a great summer!