As we progress through the second quarter of 2025, Canadian financial markets have shown resilience, with the S&P/TSX Composite Index rising 5.6% in May. This edition offers a closer look at the key economic indicators, sector performances, and monetary policies that are influencing the investment landscape in Canada, and how these factors may shape market trends moving forward.
| Index | Apr-2025 | May-2025 |
| S&P 500 Total Return | -0.7% | 6.3% |
| S&P/TSX Total Return | -0.1% | 5.6% |
Global Market Overview
U.S. equity markets rebounded strongly, driven by the improvement in investor sentiment as trade tensions showed tentative signs of easing and fears of a global recession receded. The Federal Reserve held its policy rate unchanged at 4.25%–4.50% during the FOMC meeting. Fed officials struck a cautious tone, citing “dual threats” of still elevated inflation and a potential uptick in unemployment. Inflation continued to moderate. April’s headline CPI rose 2.3% year-over-year, and core inflation stood at 2.8%, marking a second straight month of moderation. The job market remained resilient with 177,000 jobs added in April, slightly above forecasts, and the unemployment rate held steady at 4.2%. On the other hand, data confirmed a slowdown in growth as first-quarter 2025 GDP contracted by 0.3% (annualized).
Internationally, inflation continued to cool in various markets. Spain’s inflation fell to 1.9%, Italy’s to 1.7%, and Germany’s remained steady at 2.1%. Geopolitical trade developments remained the main concern of investors despite trade negotiations, which started with the EU and the 90-day trade truce with China. Economic slowdown was also reflected globally as the OECD revised global GDP growth forecasts down to 2.9% for 2025, citing trade policy impacts and inflationary pressures.
Canadian Market Overview
Canadian markets delivered solid gains in May 2025. This strength in equities came as the economy showed unexpected growth during the first quarter (+2.2%), but trade uncertainties and higher unemployment (6.9%) tempered the optimism. Gasoline and energy prices helped pull the annual inflation rate below the Bank of Canada’s 2% target midpoint, reaching 1.7%. However, core inflation remained sticky at 3.2%. Consumer sentiment improved despite staying below historical averages, reflecting cautious optimism. Retail sales increased by 0.8% in March, and the flash estimate for April is at +0.5%, with concerns that the longer the trade war persists, the more it will weigh on sentiment. On the monetary policy front, the Bank of Canada maintained its policy rate at 2.75% after seven consecutive rate cuts. However, officials vowed to “act decisively” if the economy needed support. Governor Tiff Macklem has emphasized the need to balance the risks facing the Canadian economy, indicating that future rate decisions will depend on incoming data.
Canadian Sector Performance
All major sectors of the Canadian equity market closed on a positive note in May. Cyclical and growth-oriented groups led the way, while defensive sectors lagged.
- Info Tech (+7.5%): Canadian tech mirrored U.S. Tech companies that reported strong earnings and outlooks for Q1 2025.
- Financials (+6.5%): Canadian bank stocks rose as investors reacted positively to earnings and a stable rate environment.
- Energy (+4.5%): Oil prices stabilized and even ticked up slightly this month, recovering from earlier yearly weakness.
Important Dates
- June 11: U.S. Inflation
- June 18: Fed Rate Decision
- June 20: Canadian Retail Sales
- June 24: Canadian Inflation
- June 27: Canadian GDP
Portfolio Strategy Tip
In a slower growth environment, investors are increasingly balancing exposure by diversifying across various sectors and asset classes. There’s a noticeable focus on stability through defensive sectors such as utilities and consumer staples, while still maintaining exposure to growth stocks positioned for long-term opportunities. Additionally, gold continues to be viewed as a potential hedge against economic uncertainties.
Final Thoughts
May 2025 was an encouraging month for Canadian investors. Stocks moved higher across the board, the economy showed resilience with better-than-forecast growth, and inflation pressures eased at the headline level. Yet, challenges persist: the labor market is softening, core inflation remains above target, and trade disputes are casting a cloud over the outlook. Looking forward, investors will be watching how these cross-currents resolve. The good news is that corporate fundamentals (such as bank balance sheets and commodity prices) remain solid, and the Bank of Canada has signaled its readiness to support the economy if needed. June might be an ideal time to review your portfolio’s resilience in a maturing cycle.