Additionally, shifting rate expectations have introduced volatility even in the U.S. equity market, which has long led global markets in terms of sustainable performance. Much of this is due to the market’s growth orientation, particularly its exposure to technology and artificial intelligence. Growth equity is more interest rate-sensitive than value equity because it relies on long-term earnings growth. Thus, changes in rate expectations have significantly impacted earnings expectations for some companies.
On the flipside, the Bank of Canada is entering cutting mode, just recently lowering the overnight policy rate from 5% to 4.75% with more cuts expected later. Falling interest rates could help Canadian bond holders as values start to rise, making Canadian fixed income more attractive. However, with U.S. rates remaining higher, investors chasing income may be tempted to allocate there instead.
Consumer behaviour
Amidst the volatility, Manley emphasized the importance of the consumer, given the robust U.S. labor market and resilient consumption patterns. He says, “If we’re banking on the consumer continuing to be resilient, we see some interesting dynamics. The U.S. is experiencing demographic challenges resulting in a very tight labor market. If people are employed and confident in their job security, and wage growth continues to beat inflation as it has for about a year, these factors should help keep consumer spending robust.”
If consumers continue spending, then consumer-driven components of the equity market should, in theory, do well. However, there are cracks in the armor: credit card and auto loan delinquencies are ticking up, people are starting to repay student loans after a long moratorium, and prices and the cost of living are higher.
