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Don’t be misled by the stock market’s rebound. Sadiq Adatia, chief investment officer at Toronto-based BMO Global Asset Management, warns that this is a welcome breather but not the end of the turmoil.
Stock markets have come roaring back after getting rattled in April by the uncertainty surrounding US President Donald Trump’s steep tariffs and their chaotic rollout. As equities claw back the over-20% drawdown in US stocks that followed the announcement, investors are being cautioned not to let their guard down.
With a mix of tariff deals, deferrals, and discounts in play, Adatia says it’s tempting to believe calm is returning. But since Trump “doesn’t have a clear vision of exactly what he wants,” the road ahead may be rocky. “I caution that it’s a pause, not definitive,” Adatia says of the tariff suspension. “We saw evidence in Europe, where it was supposed to be a 10%-20% tariff, then went to 50%, and now it’s back to a pause. Nothing’s concrete.”
Is the Worst Over for Stocks?
Investors must expect some volatility to persist for the foreseeable future, but Adatia assures that the worst is likely behind us. “We’re going to get calmer markets and more definitive tariff numbers,” he says.
Looking at tariff volatility, Adatia divides markets into China and the rest of the world. “For China, it’s still going to flare up,” he says. Tariffs between US and China have grown increasingly complex thanks to years of an escalating trade war and policy shifts. Recently, the countries agreed to pare their reciprocal tariff rates to 10%, from a peak of 145% just weeks ago.
Both sides understand they’re big, strong economies, and that it’s not in their best interest to negotiate higher tariffs now. But Adatia says the final rates will be much higher than 10%. Eventually, “we’ll see higher tariffs and a targeted back-and-forth, causing market volatility, especially closer to the 90-day pause deadlines,” he contends. Still, he thinks “the rest of the market will be calmer.”
In the next phase, markets will witness the more positive things Trump promised during his presidential campaign, notes Adatia. “We’ve seen the first steps in the tax cut process pass through one area of regulation, moving to the second,” he says, citing the recent US House of Representatives approving Trump’s sweeping multi-trillion-dollar tax bill, which is now headed to the Senate. However, people interpreted it “[from] the perspective of higher debt, potential downgrades on the US government a couple of weeks ago, and less likelihood of rate cuts.” As a result, the move caused bond yields to spike. If the bill gets through the Senate, “it will provide some [market] upside.”
What’s the Outlook for Canada’s Economy?
“Canada is one of the weaker economies out there right now,” Adatia says. The picture remains grim. Unemployment has been mounting, tariffs (whether 10% or slightly higher) will be a drag, and consumer spending remains weak, which Adatia says could prompt the Bank of Canada to cut rates faster to stimulate the economy.
“From a market perspective, a lot of bad news is priced into Canada,” says Adatia, who adds that he’s “not that bearish, but more neutral on Canadian markets relative to other countries.” He would like to see prompt government action on both the interest rate and tariffs front, to stem Canada’s economic slide. “From an economy standpoint, we’re going to teeter with recession unless [Prime Minister Mark Carney’s promised] tax cuts come quicker or we get positivity on the tariff situation,” he says. Until then, consumers will hold back on spending, jobless rates will keep rising, and stimulus will be needed to help the economy bounce back.
“There’s a lag period [between] when rate cuts happen and when they actually implement,” Adatia notes. “Our last inflation number went up a little, but it’s relatively low and should allow [the Bank of Canada] to start cutting again.” If inflation remains tamed, he argues that the Bank can continue to cut more aggressively than the US Federal Reserve to stimulate growth.
Another key priority for Canada is to secure a more transparent and favorable trade deal with the United States. Adatia says that since Carney took office, tensions between Trump and Canada have been deescalating. As a natural next step, the USMCA deal requires some clarification, as several aspects remain unclear—“What’s exempt, what’s [taxed at] 10%, and what’s at 25%.” Adatia says that under Carney, Canada can expect more clarity around the agreement.
How Much Will the Bank of Canada Cut Rates?
Looking at the macroeconomic picture, Adatia wants the Bank of Canada to continue cutting rates. “I would like to see at least three rate cuts, if not four [by year-end],” he says. The Bank has cut interest rates twice so far this year, leaving the policy rate at its current 2.75%.
Adatia believes relatively contained inflation and rising unemployment numbers indicate that policymakers should consider cutting. The language at the Bank of Canada’s meeting on June 4 will contain clues about its plan, “but I think it’s worthwhile to start that process [of cutting rates] so we prevent a recession and more job losses,” Adatia says.
Consumer spending is a key data point which Adatia feels is not being spoken about enough. The world economy runs on consumer behavior. “Companies are either not giving outlooks because they lack clarity or giving multiple scenarios because they don’t know how consumers will react,” he says. Nevertheless, he cites reports from Mastercard and Visa indicating that consumers are still spending despite sentiment and uncertainty.
Adatia gives 50-50 odds of the central bank cutting rates at its Wednesday meeting. “It could go either way, [but] given Canada’s poor economic data and likely 10%-25% tariffs, they should be cutting,” he insists. Either way, Adatia says it’s likely that the Canadian market may not repeat last year’s outperformance of the US markets.
A Potential Tailwind for the Canadian Economy
Despite extreme volatility being its defining feature, the underlying fundamentals of the US market are still good. US markets are slowly getting past the negativity while expecting some of Trump’s more market-pleasing moves to materialize. “Trump’s deregulation and tax cuts should give momentum, and potential interest rate cuts in the US and globally will help,” says Adatia. “You still want to be in equity markets, owning equities over bonds, and we’ll go higher.” He is underweight in US stocks but remains cautiously optimistic.
“From a valuation perspective, a lot of the worst is behind Canada, but the economy is relatively weak, so we need rate cuts,” Adatia says, adding that if the rates don’t get lowered, he “might go underweight.” However, a stronger US market could create a tailwind for the Canadian economy. “If the US is back on track and [gathers steam], it’s good for Canada, as we export a lot to the US,” he notes, adding that “a strong US economy lifts us, giving a floor.”
US Market Set to Outperform?
Once the tariff dust settles and uncertainty abates, “the US will outperform,” asserts Adatia, who points to leading themes such as AI, cloud computing, and automation. “In a choppy market, the US may lag due to higher valuations, but over the [next] six months, [they remain the preferred] overweight versus Canada,” he says. “Canada will lag due to weaker earnings and valuations.”
Time for Tactical Allocation
Adatia acknowledges that the ongoing trade war and uncertainties surrounding Trump’s policies have brought about some strategic shift in his asset allocation. He says he was bullish on US equities heading into the last quarter of 2024—a strategy that worked well for a couple of months. However, by year-end, his sentiment had turned “slightly bullish” before becoming neutral, then underweight by February 2025.
“Our timing was good as things played out with the Trump regime,” Adatia says. “Today, we’re underweight [US] equities and have moved that money to cash to wait for opportunities, [characterized by] lower volatility, lower valuations, and overreactions.” In the current environment, “the risk-reward tradeoff doesn’t make us comfortable being overweight [US] equities,” he admits.
Adatia remains neutral on Canada but overweight international markets, particularly Europe, where he sees better opportunities: “lower valuations, better yields, and Germany’s debt brake rule giving uplift to markets, plus defense spending as they rely less on the US.”
In the bond market, Adatia favors less risky issuances. “We’re neutral on investment-grade credit, preferring it over high-yield, where we’re underweight because yields don’t compensate for the risk of a slowing economy,” he says.
He remains bullish on the Canadian dollar and sees it reaching C$1.325-C$1.350 against the US dollar by year-end. Part of this strength is attributed to how “the Canadian dollar is no longer tied to oil prices like before. We’ve seen a dislocation. It’s more about world trade and economic impacts now.”
Gold as a Hedge Against Trump Uncertainty
Among commodities, Adatia’s conviction in gold has proved the most rewarding. He capitalized on the recent run-up in gold prices by “taking some profit.” Part of his portfolio since 2023, he regards the precious metal “as the best hedge against Trump uncertainty and volatility, [even] better than fixed income.” He added more gold to his portfolio “when Trump took office, as election uncertainty passed but Trump uncertainty remained.”
What Investors Are Getting Right
Adatia points to there being “fewer redemptions” during the recent tariff-driven volatility than a normal market downturn to highlight what investors did correctly. “Normally, we’d see more selling pressure when markets pull back.People knew it was about Trump and tariffs and [not fundamentals], so they stayed invested.” He says those who didn’t sell in a panic were richly rewarded when the markets had a quick, sharp bounce back.
However, some investors might appear to be complacent in “thinking everything’s rosy again,” cautions Adatia. “They’re forgetting [Trump is] unpredictable and does things that don’t always make sense. Volatility hasn’t gone away; it’s just on the sidelines.”
What Investors Need to Look Out For
Adatia fears that even if Trump gets tax cuts through, he might ratchet up pressure elsewhere. “People aren’t looking carefully at that,” he notes. “You can predict better with a rational, objective approach, but with uncertainty, which markets don’t like, volatility [returns].”
Closer to home, Adatia expresses concerns that markets aren’t paying enough attention to employment numbers and consumer spending patterns. “People are caught up with tariffs and inflation. But watch how consumers spend. We’ve seen the number of jobs available diminish, showing companies are hesitant to invest, [even though] they’re not laying off yet.” If that changes and people lose jobs, they will cut spending.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
