April 2025 Portfolio Management Team Update

Elvis Picardo

April 17, 2025

April 2025 Portfolio Management Team Update
By Elvis Picardo, CFA®, CIM, Senior Portfolio Manager, iA Private Wealth
April 16, 2025

SUMMARY

Market Review: Most global indices declined in March to cap a challenging quarter, before President Trump’s reciprocal tariffs announced on April 2 triggered the biggest slide in U.S. markets since the 2020 pandemic. The TSX Composite eked out a 0.8% gain in Q1, led by gold miners. The S&P 500 underperformed the rest of the world in Q1 by the biggest margin since 2009.

Outlook:  The astonishing developments in the first two weeks of Q2 have already cast a mighty shadow over the outlook for the rest of the year. President Trump’s April 2 rollout of the highest tariffs in more than a century injected huge uncertainty into the prospects for the global economy. Meanwhile, the outlook for the U.S. technology sector – including the market-leading Magnificent Seven – is becoming increasingly murkier amid a pullback in infrastructure spending, valuation concerns, and competition from advanced low-cost AI models out of China.

Analysts have yet to lower their forward earnings estimates for the TSX Composite despite the looming risk of a recession in Canada, which in turn makes a significant decline in the TSX a distinct possibility. The TSX has been holding up well compared to its U.S. peers so far, outperforming the S&P 500 by almost eight percentage points YTD (-2.51% vs. -10.3%, as of April 16).

Fed chairman Powell’s remarks that the central bank must ensure tariffs do not trigger a more persistent rise in inflation led to a renewed slide in U.S. indices on April 16, as investors were hoping for a more dovish Fed stance. However, it might be too early to write off the prospect of a Fed “put”, given that the uncertainty arising from the tariffs is already affecting U.S. consumer sentiment, which earlier this month tumbled to its second-weakest reading on record. The uncertain impact of the tariffs on corporate earnings is also leading many companies to withdraw financial guidance for the rest of the year.

Key Takeaways for Investors: Expect volatility to remain elevated; ignore “upside risk” at your peril; mitigate downside risk.

Portfolio Strategy: Our measures to fortify client portfolios in recent months have paid off, with our PENSION balanced growth returning -0.36% in Q1, while our PURSUIT growth portfolio was -1.23%. Although our asset allocation is neutral at the present time, we are evaluating it daily with a view to getting more defensive if market conditions warrant such a move. While we are judiciously deploying new funds in client portfolios, we continue to monitor markets for the optimal time to undertake a full rebalance of all portfolios.

Market Review

Most global indices declined in March to cap a challenging quarter, before President Trump’s reciprocal tariffs announced on April 2 triggered the biggest slide in U.S. markets since the 2020 pandemic, on worries about the economic fallout from a global trade war. Europe outperformed the U.S. massively, with the pan-European Stoxx 600 index outpacing the S&P 500 in Q1 by nearly 17 percentage points in dollar terms, a record outperformance. Here’s a summary of major markets by geography.

Canada: The TSX Composite fell 1.9% in March to finish the quarter with a 0.8% advance. The materials sector was the standout performer in Q1 with a 19.9% surge, led by gold miners as bullion soared to a record high. The energy group gained 1.5% in Q1, while defensive utilities and communication services were the only other groups to advance in the quarter.

United States: U.S. indices registered their biggest monthly and quarterly declines since 2022 in March and Q1 respectively. The S&P 500 tumbled 5.8% last month while the Nasdaq Composite plunged 8.2%, the worst monthly performance for both indices since December 2022. The S&P 500’s 4.6% decline in Q1 was its biggest quarterly drop since Q3 2022; the Nasdaq’s 10.4% slide was its worst since Q2 2022. The Dow Jones industrial Average fell 4.2% in March for a 1.3% decline in Q1. Economic uncertainty took a severe toll on small-cap stocks, as the Russell 2000 index plummeted 7.0% last month for a Q1 loss of 9.8%, the biggest slump since Q2 2022. The large-cap Russell 1000 performed relatively better, with a decline of 5.9% and 4.8% in March and Q1 respectively.

International: European indices had limited declines in March but overall posted solid gains in Q1, led by double-digit advances in Germany and Italy. Asian indices were mixed in Q1, with major markets like Japan and Taiwan down more than 10%, while India’s Sensex and China’s Shanghai Composite were marginally lower, and Hong Kong’s Hang Seng index surged 15.3%.

Overall, the MSCI AC World Index fell 4.7% last month, for a Q1 decline of 2.5%. A notable development in the quarter was the S&P 500’s underperformance relative to the rest of the world by the biggest margin since 2009 (Figure 1).

(Sources: FactSet, Bloomberg)

Figure 1: Striking underperformance by S&P 500 in Q1

Outlook

We are a little more than two weeks into the second quarter, but the astonishing developments in this brief period have already cast a mighty shadow over the outlook for the rest of the year. President Trump’s April 2 rollout of the highest tariffs in more than a century injected huge uncertainty into the prospects for the global economy. Meanwhile, the outlook for the U.S. technology sector – including the market-leading Magnificent Seven – is becoming increasingly murkier amid a pullback in infrastructure spending, valuation concerns, and competition from advanced low-cost AI models out of China.

TSX estimates still optimistic despite tariff threat

On April 16, the Bank of Canada (BoC) announced a pause in its rate cutting cycle, leaving the policy rate at 2.75%, and said it “will proceed carefully” as it waits to see how President Trump’s trade policy takes shape. Because of the uncertainty around U.S. trade policy, the BoC published two alternate scenarios (Figure 2) for the Canadian outlook, instead of the traditional single-point forecast.

In the first scenario where most tariffs are negotiated away, the BoC forecasts that growth in Canada will stall in the second quarter before rising moderately, and inflation slows to below 2% this year. The second scenario of a long-lasting global trade war paints a bleak picture for the Canadian economy, with the economy plunging into a year-long recession and inflation rising above 3% as tariffs and supply-chain issues cause higher costs and prices.

That pessimistic outlook is certainly not reflected in strategists’ forecasts for the TSX Composite, with the average 12-month target at 28,960, down a scant 1% from the end-February forecast, and implying 20% upside from the current index level of 24,106 (as of close on April 16). Index earnings estimates have also barely budged over the past couple of months, with the 2025 EPS forecast of $1,622 representing 9.9% growth from 2024, and EPS expected to rise 11.5% in 2026.

In our opinion, this suggests that analysts have yet to lower their forward earnings estimates despite the looming risk of a recession, which in turn makes a significant decline in the TSX a distinct possibility. It should be noted that the TSX has been holding up well compared to its U.S. peers so far, outperforming the S&P 500 by almost eight percentage points YTD (-2.51% vs. -10.3%, as of April 16).

Figure 2: Scenario analysis from the Bank of Canada

No Fed “Put”?

Federal Reserve (the “Fed”) chairman Powell’s remarks that the central bank must ensure tariffs do not trigger a more persistent rise in inflation led to a renewed slide in U.S. indices on April 16. Powell said that the Fed would balance its dual responsibilities of fostering maximum employment and stable prices. Overall, Powell’s comments disappointed investors who were hoping for a more dovish Fed stance that would imply a willingness to cut interest rates if the U.S. economy stuttered.

However, it might be too early to write off the prospect of a Fed “put” (the market threshold at which the Fed decides to cut rates to stimulate a recovery). The uncertainty arising from the tariffs is already affecting U.S. consumer sentiment, which earlier this month tumbled to its second-weakest reading on record even as inflation expectations soared to multi-decade highs on tariff concerns.

The uncertain impact of the tariffs on corporate earnings is also leading many companies to withdraw financial guidance for the rest of the year. With Q1 earnings season just underway, this lack of clarity on earnings could be a headwind for equity markets.

In addition, U.S. Treasuries have been trading in uncharacteristic fashion in recent weeks, selling off rather than attracting “safe haven” bids that are typical during periods of financial stress. The yield on 10-year Treasuries rose by a half-percentage point last week to 4.49%, the biggest weekly surge since 2001, pushing up borrowing costs for the U.S. economy.

Key Takeaways for Investors

Based on the foregoing, we summarize some key takeaways for investors below.

Expect volatility to remain elevated
In our January PMT Update, we had noted that volatility could resurface in equity markets this year, with a significant probability of a correction in excess of 10%. On both counts, that has been a huge understatement, to say the least.

The CBOE Market Volatility Index (VIX) last week peaked at a level just above 60, its highest level since March 2020, when the market carnage from the pandemic was rapidly unfolding. While the VIX has since dropped to a level in the low 30s presently, it’s near doubling from an average level of 17.35 in 2024 suggests that traders expect volatility to remain elevated for an extended period of time.

Ignore “upside risk” at your peril
A few major U.S. indices had skirted bear-market territory earlier this month. At its low of 4,835 on April 7, the S&P 500 had plunged 21% within a seven-week span, an unusually fast descent. The Nasdaq Composite and Russell 2000 also plummeted by about 25% in about 2½ months by the time they reached their lows in the first week of April.

On April 9, Trump’s pledge to pause tariffs for 90 days on some trading partners led to a blowout rally. The S&P 500’s 9.5% jump was its biggest since the recovery from the Covid-19 crash, while the Nasdaq’s 12% surge was its largest since 2001; the day’s gains alone literally halved year-to-date losses for both indices.

The April 9 rally underscores the risk of “timing the market.” The constant barrage of negative headlines might tempt one to get out of the equity market altogether with a view to jumping back in once things settle down. This is an exercise in futility, since such timing is difficult to execute in practice. As market surges often come close on the heels of a slide, missing out on even a few such rebounds has a significant negative impact on portfolio returns.

If market volatility is a real concern, lowering your exposure to equities within a diversified portfolio would be the prudent approach. For example, a growth-oriented investor with 75% to 80% exposure to equities could dial that down to 60% equities, with the balance 40% allocated to fixed income and alternative investments.

Mitigate downside risk
Mitigating downside risk with a view to preserving investment capital is especially important during periods of uncertainty like the present. We have done so in our client portfolios by staying defensive, diversifying equity risk and bolstering fixed income, as noted in our previous publications. These measures have paid off, with our PENSION balanced growth returning -0.36% in Q1, while our PURSUIT growth portfolio was -1.23%.

Portfolio Strategy

The Portfolio Management Team (PMT) continues to take steps to adjust portfolios to rapidly changing market conditions.

Earlier this month, we made some changes in the Platinum Growth Fund, a core holding in our client portfolios. We liquidated two small-cap fund positions based on a negative outlook for the sector and deployed the proceeds in a Europe-focused fund and a global technology fund that has been a consistent top performer.

Although our asset allocation is neutral at the present time, we are evaluating it daily with a view to getting more defensive if market conditions warrant such a move. While we are judiciously deploying new funds in client portfolios, we continue to monitor markets for the optimal time to undertake a full rebalance of all portfolios.

Please contact any member of the PMT if you have any questions or concerns regarding your accounts.

This information has been prepared by Elvis Picardo, who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.