2025 Q2 investment insights: Embracing the Unknowable
Corrado Tiralongo - 11 juillet 2025
From elevated geopolitical tensions to structural shifts in global trade, we’re potentially moving into an era where uncertainty tops risk.
As investors gain more time and experience in the markets, they’ve developed practical wisdom for navigating volatility. This not only includes risk that can be measured, but deeper uncertainties that can’t. Today, this distinction between risk and uncertainty is more relevant than ever. Markets, like nature, often follow unpredictable paths. It's not just about assessing measurable risk; it's about preparing for an increasingly unknowable world.
Risk is quantifiable. We can model it, assign probabilities and hedge against it. Uncertainty, on the other hand, eludes tidy distribution curves. It reflects a world where the range of outcomes is widening, and where shocks can be structural, not cyclical.
From elevated geopolitical tensions to structural shifts in global trade, we’re potentially moving into an era where uncertainty tops risk.
A few examples:
- The outcome of U.S. trade policy remains highly path-dependent* and susceptible to unilateral executive action.
- Fiscal uncertainty in the U.S. and major emerging markets has widened tail risks in sovereign bond markets.
- Artificial intelligence (AI)-related earnings optimism is driving U.S. equity performance, yet the magnitude of AI’s real-world impact remains uncertain.
In such an environment, the priority needs to shift from predicting outcomes to building robustness into portfolios. We believe resilience, not foresight, is the defining trait of a successful investor.
Equities: Robust momentum in the U.S., uneven elsewhere
The near-term equity backdrop looks deceptively strong. With a Middle East ceasefire holding, inflation trending lower, and the S&P 500 at record highs, markets appear to be enjoying a temporary sweet spot. But beneath the surface, vulnerabilities persist. The U.S.-China trade détente remains fragile, and July 9 marks the expiration of the Trump administration’s 90-day pause on reciprocal tariffs. Countries without bilateral trade deals, including key U.S. allies, could soon face broad-based duties.
The tentative U.S.-China deal, reportedly linked to rare earth exports, lacks details and clarity. Meanwhile, tariffs on Chinese imports still average nearly 40%**, underscoring the persistence of structural trade tensions. The uncertainty extends beyond China, with potential implications for Canada, the European Union and Mexico, depending on how policy evolves, creating headline risks and potential market dislocations.
Despite recent volatility, the S&P 500 is nearing record highs and U.S. earnings growth expectations remain constructive. With inflation risks declining and a steady monetary policy, U.S. equities retain a favourable backdrop.
However, this optimism is not universal. European and Canadian equity markets face headwinds from muted growth prospects, fiscal drag and limited tech-sector exposure. In Europe, economic sentiment continues to point to flatlining gross domestic product (GDP), with Germany, France and Italy facing rising fiscal constraints from higher defense spending targets and weak productivity growth. The European Central Bank (ECB) faces a dilemma – how to support fragile demand without undermining the euro. Meanwhile, in Canada, recent data revealed a 0.1% monthly contraction in GDP for both April and May, largely driven by a 1.9% decline in manufacturing and tariff-related disruptions in transportation equipment and wholesale trade. While services provided a temporary boost, notably from NHL playoff-related activity*** , we believe these gains are unlikely to persist.
This recent data suggests Canadian growth was likely flat at best in the second quarter of 2025, reinforcing our expectations for additional Bank of Canada rate cuts later this year, beyond what’s currently priced by the markets.
In our view, equity risk premium continues to reward a tilt toward quality and structural growth, even as aggregate valuations appear elevated. By 'quality,' we mean companies with strong balance sheets, reliable earnings and consistent cash flows. 'Structural growth' refers to firms aligned with enduring economic trends such as digitization, artificial intelligence, demographic shifts or decarbonization, forces that can sustain performance even when cyclical tailwinds fade.
Fixed income: Caution on duration, selective in credit
The U.S. Federal Reserve (“Fed”) remains divided – no near-term rate cuts are expected, but growing noise around future leadership is unsettling markets. Political interference in Fed decision-making could risk higher-term premia instead of bringing down borrowing costs. As such, we remain cautious on duration, particularly at the long end of the U.S. treasury curve.
Government bond markets remain sensitive to policy ambiguity and shifting inflation expectations. We maintain a cautious stance on long-duration assets, particularly in the U.S., where the term premium has risen sharply amid concerns about fiscal sustainability.
While core yields may rise modestly, we continue to hold Treasury Inflation-Protected Securities (TIPS) and real assets for inflation protection and high-quality corporate credit where spreads remain tight but stable. Emerging market debt offers limited upside, given deteriorating fiscal fundamentals.
Liquidity considerations remain central. With rate cut expectations now delayed, flexibility is paramount. Our bond positioning reflects a bias toward resilience, not yield maximization.
Alternatives: Embracing disparate return streams
This environment highlights the value of differentiated strategies. We continue to build exposure to private credit, real assets and liquid alternative strategies to diversify portfolio return drivers.
Private markets, particularly in credit, offer compensation for illiquidity without the duration risk of public fixed income. Meanwhile, real assets, including infrastructure and real estate, provide inflation-linked cash flows and potential ballast during equity drawdowns.
We’ve also developed custom liquid alternative strategies designed to complement traditional asset classes and respond dynamically to regime changes.
Currency: Positioning for relative strength in the U.S. dollar
In the near term, the U.S. dollar benefits from delayed Fed cuts and global rate differentials. But behind this sits a growing fiscal risk premium. Ongoing U.S. tax and spending negotiations, combined with political noise around potential Fed leadership changes, could introduce greater volatility into dollar and U.S. treasury markets.
Despite its recent pullback, we believe the U.S. dollar is positioned to rebound modestly as the Federal Reserve delays rate cuts. Meanwhile, the Canadian economy's underperformance relative to the U.S., along with dovish expectations for the Bank of Canada, also support the case for the strength of the U.S. dollar versus that of the Canadian dollar. As the Federal Reserve delays rate cuts, rate differentials continue to favour the greenback, especially as policy remains dovish across Europe and Asia.
We remain unhedged to the U.S. dollar in globally diversified mandates. A stronger U.S. dollar and a weaker Canadian dollar can provide stability to Canadian portfolios during market drawdowns and times of uncertainty.
Accepting the limits of foresight: Positioning portfolios for rising uncertainty
Despite the appearance of calm, the global economy is muddling through. Economic sentiment in Europe remains flat, China’s growth continues to undershoot its targets and fiscal risks are building across the developed world. Even in the U.S., signs of economic slowdown are likely to emerge.
We’re not yet out of the woods, but our portfolios are structured to weather the uncertain climate.
Instead of trying to speculate where the next shock is going to come from, we’re building portfolios that can absorb a wide range of outcomes, through diversification, quality bias and structural flexibility.
When the path ahead is unknowable, the most valuable tools aren’t models or metrics, but discipline, humility and resilience. With those in hand, we’re not just prepared to endure uncertainty, we’re ready to navigate it with confidence and purpose.
Economic forecasts, no matter how sophisticated, are inherently vulnerable in a high uncertainty environment. Our approach is to accept this limitation and shift the focus from prediction to preparation.