Economic Update Q4 2025

A Demanding Environment Marked by Deep Asymmetries

The year 2026 begins in a climate of transition. After three exceptional years of double-digit returns—a rare performance in the history of financial markets—investors now face a new paradigm. The normalization of monetary policies, geopolitical pressures, trade fragmentation, and macroeconomic imbalances call for a thorough reassessment of investment strategies.

The current context requires a more nuanced reading of the markets. Behind the flattering aggregate performance of 2025 lie significant sectoral and regional disparities. Selectivity, active diversification, and dynamic risk management have now become the main levers for sustainable performance.

2025: The Illusion of a Broad-Based Bull Market

The year 2025 was marked by an extreme concentration of returns. In Canada, the base metals, financial institutions, and technology sectors dominated performance. The energy transition, reindustrialization, and increased public spending on infrastructure supported raw material producers. At the same time, banks benefited from an environment of still-high interest rates combined with normalized credit risk.

The Canadian technology sector, though smaller than its U.S. counterpart, benefited from the rise of artificial intelligence applications, particularly in cybersecurity, industrial automation, and cloud services.

In the United States, polarization was even more pronounced. A handful of tech megacaps captured most of the stock market gains, while several traditional segments of the economy stagnated. Investors with limited exposure to these sector drivers saw their relative performance penalized—not due to poor management, but because of a statistical concentration phenomenon rarely observed at such scale.

A Resilient Corporate Fabric Despite Public Imbalances

While governments continued to accumulate deficits, companies demonstrated remarkable resilience. Default rates remained contained, balance sheets strengthened, and profit margins were supported by stricter cost discipline and investment focused on innovation and productivity.

This dichotomy between a weakened public sphere and a strengthened private sector represents a structural paradigm shift. Companies that anticipated rate hikes by refinancing debt, adopted flexible business models, and invested in digital transformation are now better positioned to navigate a more complex economic environment.

Interest Rates: Conditional, Slow, and Asymmetric Easing

Central banks began a monetary easing cycle in 2025 amid slowing economic activity. However, this rate reduction bears no resemblance to a return to ultra-accommodative policy. Two structural variables frame this normalization: employment trends and underlying inflation dynamics.

Markets anticipate further rate cuts, but at a slower pace and more data-dependent than in the past. The baseline scenario remains one of a cost of capital sustainably higher than during the 2010s. This profoundly transforms the risk-return trade-off, both for financial assets and productive investment decisions.

United States: Heightened Institutional Risks and Credibility Under Pressure

Institutional risk is emerging as a key concern. Frequent revisions of macroeconomic statistics (growth, inflation, employment) have weakened the clarity of indicators. This fuels a growing perception of opacity and undermines markets’ ability to anticipate monetary policy moves.

The debate over Federal Reserve independence—exacerbated by the 2026 electoral outlook and rumors of leadership changes—adds a political risk dimension. A Fed perceived as politically influenced could generate increased volatility in bond markets, weigh on the dollar, and compromise the attractiveness of U.S. assets.

Trade Tariffs: Structural Pressure on Margins

Since the second half of 2025, tariff hikes in several major economies have had a direct impact on global value chains. Companies, particularly in manufacturing, industrial, and electronics sectors, have faced rising import costs and eroding visibility.

In the short term, some domestic producers benefited from relative protection. But in the medium term, these measures have worsened inflationary pressures and weakened growth prospects. Investors must now integrate trade risks, foreign input dependency, and companies’ logistical adaptability into sector analysis.

Three Years of Exceptional Returns: A Sequence Not to Extrapolate

The 2023–2025 period delivered returns rarely seen in such a short time. But such a sequence cannot last indefinitely. Current valuations are high, performance drivers concentrated, and exogenous risks rising.

Historically, phases of very strong performance are often followed by consolidation periods. Anticipating a return to the mean is therefore a prudent reflex, while remaining positioned to capture selective opportunities.

Adapting Portfolios: An Active Defensive Strategy

In this new reality, exiting markets would be counterproductive. What is needed is a strategic restructuring focused on resilience and risk optimization:

• Greater sectoral and geographic diversification: Reduce reliance on a limited number of drivers.

• Emphasis on value stocks: Undervalued equities with sustainable dividends become attractive in a context of positive real rates.

• Refocus on quality: Companies with strong balance sheets, stable cash flow generation, and pricing power take priority.

• Strengthen exposure to high-quality fixed income: After a decade of low yields, investment-grade bonds once again offer attractive real returns.

• Systematic integration of low volatility: As a factor for long-term capital construction and preservation.

  
  

This defensive posture is not a retreat but a rational reallocation strategy after an exceptional bull cycle.

Conclusion: Navigating a Transition Cycle with Discipline

2026 will not be an easy year, but it can be a constructive one. Performance will be harder to capture, yet still accessible to investors who demonstrate discernment, agility, and discipline.

In this new cycle, defense remains the best offense. By adopting a structured, rigorous, and quality-oriented approach, one can hope to preserve and grow wealth in a more fragmented world—yet one rich with well-identified opportunities.

The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF. I have prepared this report to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The securities or sectors mentioned in this letter are not suitable for all types of investors and should not be considered as recommendations. Please consult your investment advisor to verify whether the security or sector is suitable for you and to obtain complete information, including the main risk factors. Some of the securities or sectors mentioned may not be followed by the analysts of NBF.