Stocks in Overdrive, Mood Stays Neutral

Hello everyone. Welcome to market weekend review. This is the week of August 29th, 2025. My name is Ben Lynn. I'm a senior investment strategist and head of Canadian strategy here at Russell Investments. Today we'll be talking about three major topics. First, the strong North American equity market performance. Second, some of the recent developments at the Fed. Finally, a preview of key labor market data to be released next week. So, let's get started. First, in terms of equity markets, we saw both the S&P 500 in the US as well as the TSX in Canada hit all-time highs this week. But the reasons for the strong equity market performance diverged between the two countries. In the US, strong macroeconomic data was a key driver. Second quarter GDP growth was revised upward from 3% to 3.3% on an annualized basis. In addition, some of the underlying components of GDP growth such as personal consumption expenditure were also quite robust. So it shows that the US economy is still hanging in there despite some of the macroeconomic headwinds. In Canada, it's a different story where the macro backdrop has been much weaker than in the US with GDP potentially having contracted in the second quarter. That being said, when you look at the corporate profits picture in Canada, it's actually been able to withstand some of these macroeconomic challenges. This week, we got earnings releases from several large Canadian banks, and a lot of those banks actually beat their earnings expectations. For the TSX as a whole, we saw year-over-year earnings growth of around 8%, which is pretty consistent with a longer term average. Ultimately, it's important to remember that a lot of Canadian companies derive a substantial chunk of their revenues from outside of Canada. So, even if Canada were to see a sharper slowdown in the economy, some of these Canadian companies can still manage to withstand the macroeconomic challenges. Now, you might be wondering, what are the implications of equity markets hitting all-time highs? From our perspective at Russell Investments, we think it's important to have a long-term approach to investing. Just because the the equity markets have hit all-time highs this week doesn't mean that the strong equity market momentum has to stop. In fact, when we look at our proprietary measure of equity sentiment, we see that investors are not feeling euphoric. Rather, equity market sentiment is still pretty close to neutral. And that means that we could see equity markets even end higher than where they are now by the end of the year. Next, I want to talk about some of the latest developments at the Federal Reserve. President Trump announced that he is removing Federal Reserve Governor Lisa Cook from her post. Governor Cook has indicated through her lawyers that she will contest the termination. The situation remains fluid given that this is the first time in the Federal Reserve's history of a Fed governor being removed from her position and it's hard to predict what the final outcome will be and how the courts may ultimately rule. However, in the immediate aftermath of the announcement of Governor Cook's potential removal from her post, equity markets and bond markets in the US were little changed. Ultimately, it's important to remember that in the United States, interest rate decisions are made by a majority of the voting members of the Federal Reserve Open Market Committee, which consists of the Fed governors as well as rotation of regional Fed presidents. Based on our current view that the US economy is still most likely headed for a soft landing, we continue to expect that the Federal Reserve will cut interest rates by 25 basis points at its next meeting in September. Finally, I wanted to end with a preview of the labor market data that will be released next week for both the US and Canada. And of course, so far the trend we've seen has been the US labor markets have held up better than the Canadian labor markets. In terms of the US labor market data, one key area to watch is going to be that unemployment rate. Even though we at Russell Investments expect that the US economy can achieve a soft landing, that doesn't necessarily mean the unemployment rate won't edge up slightly from here. But as long as the unemployment rate doesn't edge up by a significant amount, we can still potentially see a soft landing in the United States. So, we're going to watch the unemployment rate. We're also going to watch the breadth of job creation to see whether it's concentrated in one sector or whether it's spread across several sectors. For Canada, job creation has been much volatile. In some months, job creation in Canada has actually even been negative. So, we're going to watch to see if we get net job gains or net job losses in Canada. But ultimately, with an unemployment rate so far that's been close to 7%, we think the Bank of Canada needs to resume cutting interest rates in September. Thanks for tuning in, and we'll see you next time on Market Weekend Review. And to our North American viewers, we hope you have a great long weekend. Hi, I'm Sophie Antaly, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.