Author: Scott Barlow

With this edition of Market Factors, we discuss why guarding against investment mistakes with domestic stocks should be a top priority and why the U.S. markets may not be all that great either. The diversion features brilliant nature photography and we look ahead to important data releases.

Tariffs

Do nothing

Things could get really bad for the domestic economy if tariffs remain in place, with all the unemployment-related pain that implies. Or, as in the case of Colombia, the tariffs could be removed inside of a week if adequate forms of obeisance are performed.

The U.S. president could also increase the new duties if he gets annoyed about retaliatory tariffs and Doug Ford’s public defiance. Mr. Trump could also be harbouring anti-Canada vindictiveness about the troubled Trump Hotel deal in Toronto in 2016 (as a real estate banker friend suggested to me). Mr. Trump stated that he wants U.S. banks to be able to operate freely in Canada but we know that’s not going to happen, so maybe this whole process takes longer than expected. Seemingly anything is possible.

The sheer volume of potentialities suggests investors shouldn’t bank on any one of them happening. This, I think, explains the surprisingly muted market reaction to the tariff news on Monday.

The S&P/TSX Composite opened down roughly 2 per cent and the Canadian dollar was lower by seven-tenths of a U.S. penny. I expected worse until I thought about it.

The best thing investors can do here, really the only thing, is nothing. The worst case investment scenario in the short term is to sell everything Monday afternoon, have the tariffs rescinded Thursday, and miss the recovery rally.

Selling everything and having the tariffs remain has a better outcome – it preserves capital when the inevitable domestic growth slowdown hits. The odds are, however, that these investors will miss the bottom of the market and miss a good portion of the recovery whenever it happens.

Staying long, even if it’s an unexciting idea that gets financially painful, is the option with the highest probability of eventual success. There is plenty of time to search for unjustly oversold, high quality domestic stocks but in the next few days the odds of making a mistake are too high.

Equities

U.S. markets now dangerously narrow

I’m not bearish but I am becoming more open to bearish arguments as the similarities between markets now and in the late 1990s pile up. The latest salvo comes from RB Advisors’ most recent report, Narrow markets are the exception, not the rule.

The report notes that 2023 and 2024 were the narrowest U.S. markets since 1998/99. Only 30 per cent of S&P 500 constituents beat the benchmark ln 2023 and slightly fewer index stocks outperformed in 2024. This is similar to 1998 and 1999 when roughly 25 per cent and 33 per cent, respectively, beat the S&P 500. The long-term median is 48 per cent of companies outperforming.

Team sports offer a good metaphor for why narrow markets are bad. A team with a number of good players and a deep bench is healthier because if one gets injured, the others can pick up the slack. Another decent payer can come off the bench without a big drop in competitiveness. A team dependent on one player, on the other hand, will slide well down the standings if that player gets hurt or underperforms.

If Nvidia and Meta Platforms are the Lionel Messi and Connor McDavid of today’s market, investors don’t seem overly concerned about the added risk. The monthly Conference Board Consumer Confidence Survey asks Americans whether they believe markets will be higher in 12 months. The RB Advisors report informs that “the past two months’ readings show a level of confidence in the stock market never seen in the survey’s history.”

RB Advisors also highlights recent Goldman Sachs research showing that volatility increases significantly in years after extremely narrow markets. The years 2000-2005 are the poster children for this. Investors kept waiting for technology to retake market leadership only to have energy and consumer staples outperform the S&P 500 Info Tech index by 141 per cent and 120 per cent, respectively.

Diversification away from the popular sectors is the recipe for success according to RB Advisors, protecting against the index’s high weighting in popular sectors while also providing portfolio exposure to industries that assume market leadership.

Diversions

Worth more than 1000 words?

Pictures are worth 1000 words so I don’t have to type much here. The winners of the Canadian Geographic Photos of the Year took some breathtaking shots, as CBC shows here.

The essentials

Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.

Globe Investor highlights

Darcy Keith on how money markets have shifted their BoC rate cut bets as tariffs become reality, and how economists are reacting to all of the latest mayhem.

Tim Shufelt answers the question, “With Trump’s tariffs, is it unpatriotic to buy U.S. stocks?”

Reuters reports on how investors are betting Musk and Tesla will make a fortune under Trump even as threats mount

What’s up next

The net change in employment for January is the big economic release domestically. That’s out Friday and 22,900 new jobs are expected. The unemployment rate is expected to come in at 6.8 per cent. Before that we have the S&P/Global Canada Composite PMI for January on Wednesday.

A few important earnings reports are also on the calendar. Suncor Energy Inc. is out Wednesday (C$1.166 per share expected). Thursday sees BCE Inc. ($0.718 and maybe guidance about the dividend) and Open Text Corp ($0.932).

The Americans’ ISM Manufacturing for January on Monday came in at 50.9, ahead of the forecast 50.0. Factory orders for December will be announced Tuesday with 0.5 per cent month over month growth expected. ISM Services for January is out Wednesday and an expansionary 54.5 reading is forecast. Unit labour costs for Q4 will be released Thursday and 3.4 per cent annualized is expected. Non-farm payrolls for January is reported Friday – 150,000 new jobs are expected.

U.S. pharma giants Merck & Co. Inc. (US$1.641 per share expected) and Pfizer Inc. (US$0.467) report Tuesday along with Alphabet Inc. (US$2.13). Walt Disney Co releases results Wednesday (US$1.424) and so does QUALCOMM Inc. (US$2.97). Amazon.com Inc. (US$1.475) reports Thursday.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)

In today’s newsletter, you’ll learn why a Goldman Sachs’ chief global strategist is recommending reducing portfolio risk. Later, a Rabobank analyst details some confusion surrounding DeepSeek and we’ll take a look at the latest advances in supersonic air travel.

Equities

Goldman Sachs sees a lot of risk but no bear market

A research report from Goldman Sachs chief global equity strategist Peter Oppenheimer assuaged investor fears that this week’s volatility signaled a bear market – but then gave clients a bunch of reasons to worry.

We’ll start with the good news. The strategist first argued that the greater than 3.5 per cent drop for the Magnificent Seven stocks on Monday was merely a correction, and does not represent a longer-term peak for the S&P 500. Bear markets have historically resulted from recession fears that reduce profit expectations. Goldman Sachs, however, sees only a 15 per cent chance of recession and also believes the Federal Reserve will cut rates, which will support risk assets.

The report made a quick turn to pessimism after that. Mr. Oppenheimer noted that U.S. equities are priced for perfection and highly sensitive to any bad news. Valuations are high relative to history, even if large-cap technology stocks are excluded. (Elsewhere on Wall Street today, Citi strategist Scott Chronert noted that the PE to growth ratio for the Magnificent Seven is actually lower than that for the non-Magnificent of the 493 stocks in the S&P 500, a finding that took me aback).

Global markets are concentrated in three major ways: U.S. stocks have come to dominate global equity indices, technology as a sector is dominating benchmarks, and there is also a portfolio trend towards large positions in a few single stocks. All this makes the rally more fragile.

The strategist is clear that technology dominance arises from superior performance, not pure speculation, but concentration is still a concern for investors.

As for the AI investment theme specifically, Mr. Oppenheimer raised concerns about whether the companies investing the most currently will be the primary beneficiaries when usable AI technologies permeate the global economy. He raised the disquieting potential parallel to the telecom buildout in the late 1990s. The telcos that built the internet’s infrastructure did not reap the bulk of the profits and stock prices suffered considerably.

Mr. Oppenheimer recommends portfolio risk reduction through diversification. That means an overweight position in bonds, exposure to the equal weighted S&P 500 to guard against a tech wreck, and holding more non-U.S., non-tech stocks with consistent earnings growth.

AI

It’s not entirely clear DeepSeek is playing fair

Rabobank senior macro strategist Benjamin Picton jokingly renamed DeepSeek as ChatCCP, which I applaud. His report also provided a solid guide to what’s next after the Chinese AI Sputnik roiled markets.

Mr. Picton first noted the serious threat DeekSeek represents for the AI-related U.S. tech giants like Nvidia Corp., Meta Platforms Inc. and Microsoft Corp. DeepSeek’s claim, that its open source app was trained for less than US$10-million when current developed world training takes literally billions of dollars in data centre development, means the company had easily stepped over the competitive moat the U.S. companies believed they had.

DeepSeek’s contention of cheap training are dubious according to the strategist. He writes, “it is very likely that DeepSeek has in fact relied on U.S. chips that it wasn’t supposed to have and may not be able to access in the future.” He also noted that because the software is open source, the code is being studied right now and the ability of developers to replicate DeepSeek’s results at the same bargain price will be important to tech stock performance in the weeks ahead.

Diversions

Supersonic travel for everyone

At some time during the 1960s the romance of air travel peaked and began a steady decline to the point where the airlines are viewed as just Greyhound buses in the sky, but with far more logistical hassles before getting on. It hasn’t helped that, the inefficient Concorde aside, passenger planes look largely the same as they did 50 years ago. They don’t go much faster either – most of the new technology is focused on efficiency and automation.

A company named Boom Supersonic is trying to alleviate this tedium. The company successfully tested its XB-1 aircraft recently and became the first private entity to fly a plane faster than the speed of sound. The XB-1 is a prototype for a cool looking passenger plane called Overture they are developing that will offer supersonic travel. Importantly, Boom Supersonic is testing technology that will minimize the sonic boom that disrupts activity on the ground and limits the airtime at faster than sound travel.

The essentials

Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.

The Rundown

Reuters reports on why an AI stock shock could spark broader gains in U.S. market

Former portfolio manager Tom Czitron points out that this is a good time to rebalance portfolios given that big returns are unlikely to be repeated this year

Global investors now see China as a market for smaller bets with quicker payoffs

Arjun Deiva used FactSet data to go hunting for ten Canadian dividend stocks to weather market turbulence

What’s up next

The Bank of Canada cut rates by 25 basis points to 3.00 per cent Wednesday morning as expected. The only domestic economic release of wide interest to come this week is month-over-month GDP for November on Friday, which is expected to show a 0.1 decline.

TSX earnings season is heating up, with CGI Inc. ($1.973 per share expected) and Canadian Pacific Kansas City ($1.236) reporting Wednesday and Rogers Communications Inc. ($1.358) and Canadian National Railway Co. ($1.938) Thursday. Imperial Oil Ltd. ($2.115) releases results Friday ($2.115) and Suncor Energy Inc. ($1.155) is up next Wednesday.

In the U.S., where the Federal Reserve opted Wednesday to leave interest rates unchanged, annualized GDP for the fourth quarter is out Thursday, with 2.7 per cent growth forecast.

The Fed’s favourite inflation gauge, the PCE Price index, will be reported Friday and a month-over-month increase of 0.3 for December is expected. The ISM manufacturing survey for January comes out Monday with a still-contractionary 48.9 reading expected.

The S&P 500 earnings calendar is busy, beginning with Tesla Inc. (US$0.752 per share expected), and Meta Platforms Inc. ($6.784) on Wednesday followed by Quest Diagnostics Inc. ($2.184), Mastercard Inc. ($3.692) and Apple Inc. ($2.350) on Thursday. Exxon Mobil Corp. ($1.562) and Colgate-Palmolive Co. ($0.889) report Friday. Alphabet Inc. ($2.127) is up Tuesday and QUALCOMM ($2.965) releases results next Wednesday.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)