FINANCIAL MARKET REVIEW:

The strong surge in commodities has been the story of the summer so far. Oil rose more than 30%, while gold rose 10%. As for copper, its progression exceeded 7% in July and August. These marked increases put pressure on short-term inflation and on monetary authorities around the world.

The S&P 500 index rose 2.7% in August, propelled by stocks in the energy, basic materials and technology sectors. In Canada, the S&P/TSX index rose 3.1% last month. The best performing sector was basic materials with growth of 25.8%.

The European/Asia markets and emerging markets were also buoyant with respective performances of 1.4% and 1.9%.

Speculation about a Fed rate hike in September pushed rates higher.

Interest rates for 2 and 10 year maturities ended the month up 0.08%.

As a result, the performance of the Canadian bond index fell by 0.10% in August.

The rise in raw materials pushed the loonie up (1.2%) against the US Dollar.

OUTLOOK:

 Economy:

Despite the war in Iran and the surge in oil prices, the global economy continues to do well. The ISM index of world production continues to remain comfortably in the expansionary zone. The price sub-components, although still elevated, appear to be returning to more normal levels.

Global PMI indices – production and prices:

As for the job market, it gradually continues to be less tense. According to the Labor Market Tightness Index of the Federal Reserve of New York, it is close to its historical average, or close to balance.

Job market- (United States):

We are currently observing record profit margins in the American economy over the last 80 years. How is this explained? Productivity per hour worked has been very high over the past 3 years. In addition, companies were able to pass on price increases to consumers. More profitable businesses have more ammunition to make capital investments. This bodes well.

Corporate profit margins – national accounts (United States):

In the Canadian real estate market, affordability continues to improve slowly. In Vancouver and Toronto, affordability levels have returned to where they stood before the pandemic. In Montreal, buying a property costs more than 32% more than renting an equivalent home; in 2022, that figure was 56%.

Housing affordability in Canada

Fixed income:

It has now been a quarter since the Fed president demonstrated a restrictive bias. September 16 could finally be the time to raise the federal funds rate. As of this writing, the odds are 50-50.

Expectations for the FED’s key rate are for an increase in 2026 and another increase in the first half of 2027.

Implied short-term interest rates (US):

If the Fed decides to do so, it will be a rate adjustment and not the start of a new cycle of raising the key rate. In our opinion, it is far from certain that this will happen.

First, the latest inflation and wage statistics show us that we have fallen back into the range that has prevailed since 2024.

Inflation and wages (United States):

Second, daily inflation measurements from the firm Truflation inform us that the trend in core inflation is expected to continue its downward trend over the coming months.

Truflation and core inflation (United States):

Third, real federal funds rates have risen recently and remain elevated relative to where we are in the economic cycle.

Real federal funds rate (United States):

Finally, 10-year rates are rising sharply across the world. In a sense, the Fed chairman was able to tighten credit conditions without even raising rates. Investors can take advantage of these more attractive rates, especially since the increase reflects higher real rates, and not higher inflation expectations.

10-year rates around the world:

Stock Markets:

The backdrop for global stock markets continues to be favorable. MSCI World profits continue to be revised sharply upwards.

Forecast MSCI World Index earnings growth:

As expected, the wave of high momentum stocks crashed in July-August. Probably some quality titles have been thrown out with the bathwater. Some AI input suppliers now trade at lower multiples than the World Index (11 sectors). Hyperscalers such as Google, Meta, Amazon and Microsoft are trading at their lowest multiples in 10 years. At these levels, it is more difficult to speak of a speculative bubble.

Evaluation of IA stocks vs. MSCI World:

The normalization of valuation multiples has been directly reflected in the risk premiums of holding stocks (vs. risk-free bonds). Risk premiums still remain low on a historical basis.

Risk premium of different stock markets:

CONCLUSION:

The backdrop for stocks remains positive. The standardization of valuation multiples has impacted most sectors, including technology. There’s always time to get your hands on quality titles. With real interest rates at their peaks, holding fixed income securities should not be neglected.

Frédéric Mercier CFA, SIPC

Director – Financial Markets