The U.S. Federal Reserve (Fed) raised interest rates by 25 basis points (bps) in September, marking its first rate hike since July 2023, as inflation remains persistently above target. While inflation has reaccelerated, we believe the recent pressure may prove transitory, reflecting higher food and energy prices stemming from the conflict in the Middle East, tariffs and the broader deglobalization trend. As of October 5th, markets are pricing in roughly an 80% probability that rates remain unchanged at the October meeting.
Against this backdrop, U.S. economic activity remains resilient, with forward-looking indicators pointing to continued expansion across both manufacturing and services sectors. We maintain a constructive outlook on U.S. equities, supported by continued economic growth and strong earnings growth, while recognizing that further increases in interest rates could create near-term pressure on more rate-sensitive equities.
Moving north of the border, Canadian equities have broadly kept pace with U.S. equities year-to-date (YTD). Recent data reaffirm our view of a broadening recovery in Canada’s economy:
We maintain modest exposure to Canadian equities as the underlying economic fundamentals remain supportive. However, upside risks to inflation and continued tariff uncertainty could challenge the durability of Canada’s economic recovery. In September, the Bank of Canada (BoC) held its policy rate unchanged at 2.25%, with most Canadian banks expecting rates to remain on hold through year-end.