Key Takeaways
U.S. Market Leadership
- Year-to-date gains remain heavily concentrated in mega-cap technology, particularly the “Magnificent Seven.”
- Alphabet, Nvidia, and Microsoft have been primary drivers, supported by strong earnings and Fed easing expectations.
- Market breadth remains narrow, raising concerns about sustainability.
Canadian Market Momentum
- TSX Composite has rebounded strongly, up ~20% YTD, outperforming major U.S. indices.
- Financials and energy are leading sectors, helped by softening inflation and labour market data.
- Early Bank of Canada rate cuts have provided an additional tailwind.
Index Performance (YTD) (September 25th , 2025)
- TSX Composite: +20% (best-performing major North American index).
- Nasdaq 100: +15.3%.
- S&P 500: +11.8%.
- Dow Jones: +8.0%.
Valuation Concerns
- S&P 500 trading at ~23.5× forward earnings, back to 2024 highs.
- Equal-weighted S&P also elevated at 17.7×.
- Technology, especially the Magnificent Seven, trades at ~35× earnings.
- Narrow leadership historically increases correction risk.
Fed Chair Powell’s Caution
- Powell remarked that equity prices are “fairly highly valued” (Sept. 23).
- His comments triggered profit-taking as investors reconsidered stretched valuations.
Technical Indicators
- S&P 500 appears overbought across daily, weekly, and monthly timeframes.
- RSI readings above 70 flag stretched conditions that could lead to volatility.
Small-Cap Risks
- Russell 2000 rallying on rate-cut optimism, but fundamentals remain weak.
- High leverage, shorter debt maturities, and low profitability make broad exposure risky.
- Selectivity is essential in small-cap allocations.
Central Bank Shifts
- Fed cut rates by 25 bps in September; signaled another cut this year.
- BoC also cut 25 bps, bringing rates to 2.5% (lowest in 3 years).
- Both signal further gradual easing if growth softens.
Labour Market Cooling
U.S.
- Payrolls up only 22,000 in August; unemployment rose to 4.3% (4-year high).
- Job growth averaging 27,000/month vs. prior strength.
Canada
- 100,000+ jobs lost in July–August; unemployment up to 7.1%.
- Losses broad-based across sectors, adding pressure for further BoC easing.
Inflation & Policy Outlook
- U.S. CPI: 2.9% y/y in August; core remains sticky.
- Canada CPI: 1.9% y/y; more room for BoC to ease.
- Divergence: U.S. core inflation may limit Fed cuts, while Canada has more flexibility.
Portfolio Positioning
- Trimmed equity exposure; ~5% cash raised for flexibility.
- Remain selective in tech/communications due to stretched valuations.
- Favor high-quality fixed income for defense and stability.
- CFG Income Fund: maintaining put-writing strategy on U.S. Treasuries.
Final Thoughts
- Markets remain resilient but leadership is narrow and valuations stretched.
- Labour markets weakening adds risk to the outlook.
- Expect higher volatility ahead as rate cuts are balanced against slowing growth.
- Focus remains on capital preservation, selective equity exposure, and defensive fixed income positioning.