Trade Wars, Global Strikes, and an AI Arms Race – A Year of Battles

Ever since the pandemic, the stock market has made a habit of outperforming in the face of adversity. Despite a swathe of global tariffs, a shaky labour market, and several unprecedented international interventions from the US military (including the strikes on Venezuelan boats accused of ferrying drugs), the S&P 500 crested new all-time highs in 2025 thanks to the AI arms race. Capital expenditures in the space represented nearly 1 per cent of the country’s GDP, approaching the 1.5 per cent seen during past booms. The enthusiasm has contributed to high valuations and index concentration among AI players, while non-AI software-as-a-service stocks have been shunned on fears that ChatGPT-savvy start ups are coming for their lunch. Still, profits remain allusive among AI firms, leading to concerns that the US is headed for dotcom 2.0. Fears are compounded by a shaky bond market, creeping leverage and broader credit concerns. For now, tech executives seem keen to maintain the blistering buildout; with their (currently) iron-clad balance sheets and strong free cash flows, they have plenty of leeway to keep the ball rolling in 2026.

For the first time in a while, stronger returns were found outside the US, with Canadian and international stocks outperforming the S&P 500. One contributor was the other investment gold rush around…gold, which saw prices surge to the highest level on record as investors sought to diversify their market risk, bolstering Canada’s mining sector.

Canada’s broader economy is still struggling amid tariffs and weak capital investment, something Prime Minister Mark Carney is looking to change with a push to diversify trade, attract foreign capital, and fast track infrastructure projects. The Prime Minister has even signed a memorandum of understanding with Alberta for west coast pipeline to help send oil to markets outside the US. Interestingly, Canada managed to keep 85 per cent of its exports to the US tariff-free thanks to its CUSMA agreement. Still, the reforms may prove necessary – CUSMA comes up for review in 2026, and trade talks between Canada and the US haven’t resumed since Trump cut them off in October over an anti-tariff ad.

As remarkable as the past 12 months have been, 2026 has already seen the capture of Venezuelan dictator Nicolas Maduro, deadly protests in Iran, legal threats against the US Federal Reserve chair, and a push from Trump to annex Greenland. Keeping true to their post-pandemic nature, stocks so far haven’t seemed to notice the turmoil. For those hoping for a quiet 2026, there’s always next year.

As always, we thank you for your support and continued confidence in WDS.

Equities

In spite of Canada being one of the first country’s targeted by Trump’s tariffs in 2025, the S&P/TSX Composite Index ($TSX) crested a new all-time-high this year, rising a remarkable 28.3 per cent (31.7 per cent with dividends). Performance was strong across a number of sectors, including consumer discretionary (up 28.3 per cent), financials (up 30.8 per cent), and information technology (up 22.9 per cent), but materials led the pack, with the area doubling in value thanks to a surge in precious metal prices. Not every sector joined in the gains, however; industrials, real estate and health care were all roughly flat for the year.

US equities likewise managed to post solid performance for 2025 in US dollar terms, with the S&P 500 ($SPX) rising 16.4 per cent for the year, achieving a total return of 17.9 per cent when including dividends. In Canadian dollar terms, however, the total return was weaker at just 12.4 per cent due to a decline in the US dollar’s value. By sector, communications and information technology topped the group amid the AI buildout, while consumer staples and real estate lagged.

Meanwhile, after years of underperforming, international stocks (gauged by the MSCI EAFE Index, EFA) managed to rise 31.9 per cent on a total return USD basis (21.9 per cent in CAD terms). The outperformance comes thanks to the dollar’s weakness and a broad investor rotation out of the US.

Fixed Income and Interest Rates

2025 saw the continued descent of interest rates across most developed countries, with Canada seeing four rate cuts of its own, ultimately ending the year at a 2.25 per cent policy rate. The rate now sits at the lower bound of the Bank of Canada’s “neutral rate” estimate range, whereby the policy rate neither stimulates nor depresses the economy. Further cuts have been suspended for now amid a stronger-than-expected GDP print in the third quarter (up 2.6 per cent year over year in the third quarter) and rising wage inflation. Uncertainty remains high amid trade tensions with the US, but federal supports for impacted industries and a push to bolster “nation building projects” are expected to help the economy’s growth in 2026.

Despite the rate cuts, longer-term yields haven’t moved much, with treasury bond demand weakened amid higher government spending. For 2025, the FTSE TMX Canada Universe Bond Composite Index fell 0.4 per cent.

The US Federal Reserve itself brought the Federal Funds target range down by 75 basis points in the second half of 2025 to 3.50 – 3.75 per cent. The central bank further halted its quantitative tightening program in December, allowing the bank to roll over maturing bonds. While tariffs continue to push up prices and US GDP growth has surprised to the upside (up 4.3 per cent year over year in the third quarter), a shaky labour market has prompted a more accommodative policy.

Currencies

Canada experienced an uptick in inflation above its target in the second half of 2025; while the headline figure rose to just 2.2 per cent in November, core inflation rose steadily to 2.9 per cent in November. Rate cuts from the central bank have contributed, but reflect the Bank of Canada’s desire to support the economy through tariff-related headwinds. A recovery does appear underway, with unemployment improving marginally from 7.1 per cent in September to 6.8 per cent by November, and the country’s trade balance recovering from its “Liberation Day” record low of over $7 billion in April to just $580 million in October, even entering a surplus in September. The recovery is namely thanks to non-US trade, which made up a record 15.6 per cent of the country’s total exports in October.

The US dollar experienced a notable sell off at the beginning of the year amid tariffs and Big Beautiful Bill jitters, with the Greenback dropping roughly 10 per cent when measured against a basket of foreign currencies. While controversial, Trump’s tariffs have successfully reduced America’s trade deficit, which dropped 60.5 per cent year over year to $29.4B USD in October, it’s lowest level since 2009. A smaller trade deficit has its consequences, however, including less demand for dollars outside the US. The Greenback’s pain was the Loonie’s gain, which rose 5.0 per cent for the year.

Commodities

Oil prices fell in 2025, with the West Texas Intermediate ($WTIC) ending the year down 19.9 per cent at $57.4 USD a barrel. While 2025 saw military actions from the US against oil-rich regions, something that often bolsters oil prices, OPEC’s rolling back of production restrictions led global production growth of an estimated 3 million barrels per day to outpace demand growth of an estimated 830 thousand barrels per day, according to the International Energy Agency. After capturing the country’s dictator in early 2026, the US now hopes to bolster oil production in Venezuela; with the market already in oversupply, the economics may prove challenging.

Gold meanwhile had a remarkable year, pushing past both the $3,000 and $4,000 price level to end the year at $4,308.0 USD per troy ounce. While some attributed the 65.0 per cent rise to a so called “debasement trade,” the belief that markets were losing faith in the US dollar, stable inflation expectations and bond yields suggest the surge was more likely driven by investor “fear of missing out” and AI bubble concerns. Gold wasn’t the only precious metal to jump; silver itself rose 144.8 per cent, while lesser-traded platinum surged 121.8 per cent. Despite a year of crypto-friendly policy changes in 2025, bitcoin itself ended the year down 6.3 per cent.

This report is provided for your information. Conclusions and opinions given do not guarantee future events or performance. Facts and data provided are from sources we believe to be reliable, but we cannot guarantee they are complete or accurate. This report is not to be construed as an offer to sell or a solicitation of an offer to buy any securities. Before making an investment or adopting an investment strategy, each investor should review his investment objectives with their investment advisor. Watson Di Primio Steel (WDS) Investment Management Ltd. and individuals and companies who are related may, at any time, buy or sell securities that are hereby described in this report.