Christine Poole, Co-Chief Investment Officer, Davis Rea
Focus: North American large caps
Top Picks: Microsoft, S&P Global, Enbridge
MARKET OUTLOOK:
Financial markets have been remarkably resilient in the face of U.S. President Donald Trump’s relentless tirade about tariffs with America’s trading partners and cost-cutting efforts by the Department of Government Efficiency (DOGE). So far, most announced tariffs have a delayed implementation date, suggesting the levies may be used as a negotiating tool rather than permanent policy change.
The ultimate size, scope, and duration of new tariffs are key to how they will affect the economy, interest rates, and the stock markets. Tariffs impart a modest stagflationary shock to the economy, as the price-boosting effects of tariffs erode growth in real income, thereby weighing on growth in consumer spending. In Canada, the threat of looming tariffs has already discouraged domestic capital investment.
The U.S. Federal Reserve decided to pause its easing cycle at its last policy meeting on Jan. 29 due to a combination of solid economic activity and an inflation rate that remains above the Fed’s target of two per cent. Stickier inflation means consensus expectations for further rate cuts have been pushed out to the latter half of the year, with more gradual easing compared to many other advanced economy central banks, including the Bank of Canada.
Relative resilience in U.S. economic activity combined with more restrained Fed easing should support the greenback against most other currencies over the foreseeable future. A strong U.S. dollar is a headwind on profits for U.S. based multi-national companies. With the earnings season largely behind us for the S&P 500 companies, forward earnings per share (EPS) guidance takes into account prevailing currency rates. The consensus for EPS growth in 2025 is 11.4 per cent, which supports the potential for positive price returns this year, although the outlook remains uncertain due to concerns over U.S. trade policy.
Investors should resist the temptation to adjust asset mix based on current events, but rather, stay invested within a portfolio asset mix that meets their risk tolerance level, return objectives, and liquidity needs. Their equity holdings should be diversified across industry sectors and geographies, consisting of financially sound companies led by experienced management teams.
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TOP PICKS:
Microsoft (MSFT NASD)
Microsoft is a global technology company providing a wide range of software services and products including Windows, Office 365, LinkedIn, and Azure cloud computing as well as owning a leading gaming platform, Xbox, and video game publisher Activision Blizzard. Its business segments include Productivity & Business Tools, Intelligent Cloud, and Personal Computing. Its growing recurring revenue stream and strong balance sheet are appealing investment attributes. Microsoft’s dividend yield is 0.8 per cent.
S&P Global (SPGI NASD)
SPGI is a diversified financial information services company and operates in five business segments: Market Intelligence, Ratings, Commodity Insights, Mobility, and Indices. Its businesses are leading players within their respective sectors, providing proprietary “need to have” information with attractive organic growth opportunities. Due to the subscription-based nature of many of its services, over 70 per cent of SPGI’s revenue base is recurring. SPGI provides a dividend yield of 0.7 per cent.
Enbridge (ENB TSX)
Enbridge is a North American infrastructure company that owns and operates the world’s largest crude oil and liquids pipeline system, an extensive natural gas pipeline system, a large natural gas utility franchise and has a growing renewable energy portfolio. Enbridge’s low commercial risk model is anchored by 98 per cent of its cash flows underpinned by cost of service or take or pay contracts and 95 per cent by investment grade counterparties. Enbridge offers an appealing 6.2 per cent dividend yield and has increased its dividend for 30 consecutive years.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| MSFT NASD | Y | Y | Y |
| SPGI NASD | Y | Y | Y |
| ENB TSX | Y | Y | Y |
PAST PICKS: Jan. 22, 2024
JPMorgan Chase (JPM NYSE)
Then: US$170.11
Now: US$272.95
Return: 60%
Total Return: 63%
RTX Corporation (RTX NYSE)
Then: US$85.02
Now: US$124.49
Return: 46%
Total Return: 49%
WSP Global (WSP TSX)
Then: $191.96
Now: $254.73
Return: 33%
Total Return: 33%
Total Return Average: 48%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| JPM NYSE | Y | Y | Y |
| RTX NYSE | Y | Y | Y |
| WSP TSX | Y | Y | Y |
