In this episode of Your Wealth Matters, Maria Dawes sits down with Paul Carter, our Chief Investment Officer, for a comprehensive review of Q2 2025 and what’s driving market performance this quarter.

Learn about the surprising strength of equity markets despite a long list of global concerns—from rising geopolitical tensions and persistent inflation to weakening currencies and looming recession risks. Maria and Paul break down why markets are rallying, what’s fueling investor confidence, and where opportunities lie moving forward.

Key takeaways include:

• Global uncertainty vs. market highs – Why equity markets are reaching new records amid political and economic turbulence.
• Recession watch – Comparing US and Canadian economic outlooks, and what recent data signals for the remainder of the year.
• Valuation risks and sector divergence – Understanding the gap between growth stocks like Nvidia and overlooked value sectors.
• Lessons from history – What the Nortel boom teaches us about today’s AI-driven rally, and the importance of diversification.

As always, our team is keeping a close eye on both risks and opportunities and remains focused on long-term fundamentals. Watch the full video to hear how we’re navigating today’s market landscape and where we believe value still exists.

After an eventful second quarter, investors are facing a curious contradiction: equity markets continue to reach record highs, even as recession concerns, geopolitical tensions, and inflationary pressures dominate the headlines. From ongoing trade negotiations and fiscal uncertainty to the dramatic rise—and valuation debate—around tech giants like Nvidia, Q2 has tested both market fundamentals and investor psychology.

In this video update, we’ll break down the key drivers behind this market resilience, share how Capstone is assessing both risks and opportunities, and provide insight into how our portfolios are positioned for the second half of 2025 and beyond.

Maria: Hello, everyone. Welcome to another edition of Your Wealth Matters. I am here today with my colleague Paul Carter. Welcome Paul. Today, we're going to be reviewing some of the market events that we've seen happen over the last quarter, and it's been a pretty full quarter. So just bear with us.

I hope this style of presentation will be easily digestible and that you'll enjoy it. So without further ado, Paul, why don't you start us off with some highlights? The stock market, at least, is reaching some new highs. So what's the deal with that? Where are we at?

Tariffs, Tensions, and Trade Deals

Paul: Very good question, Maria. I know investors are always dealing with something. There's never a quarter where nothing is happening in the markets. There's always something for people to be worried about, but these days it seems like the list of worries is particularly long. That list includes geopolitical issues.

First and foremost, what's happening between Iran and Israel is very concerning, not just to investors but to everybody. Fortunately, after the US carried out strikes in Iran in June, we're now in a ceasefire situation. A month into that ceasefire, it looks like that ceasefire is very tenuous at best.

Iran's president said yesterday that Iran has absolutely no intention of dropping their nuclear capabilities, and in fact seems to be bracing for war yet again with Israel. We're getting questions about that from investors, and that is pretty concerning.

You've got the tariff situation, which we've been talking about for what seems like forever, but certainly in the last few months, it's been an on-again, off-again situation between the US, Canada, and other countries. Here in Canada, we're about one week away from 35% tariffs being imposed if a trade deal isn't struck.

Maria: We hear that on the news every minute of every day.

Paul: And by the time we finish this, I'm sure the news will have changed yet again. It is an ongoing issue that creates a tremendous amount of uncertainty, not just for investors but companies. Companies do not know if they should invest in the next project they've been talking about.

Paul: You're seeing investment dollars dry up in capital spending, which has a knock-on effect on potential future corporate profits. That is a big concern amongst the investment community. You've got fiscal policy in the US. On July 4th, they just passed the One Big Beautiful Bill Act, which President Trump is hailing as a massive victory.

But just this week, the Congressional Budget Office came out and said that this act is going to add $3.4 trillion to the US debt over the next decade. That's very concerning in a number of different ways. And here in Canada, Prime Minister Kearney hasn't come up with the fall budget yet. That's coming up in the coming months, and we don't know exactly what that's going to say, but I think it's pretty fair to assume we're going to be running fairly significant deficits in the years ahead here in Canada.

All of that has investors concerned because what does that mean for inflation? What does that mean for interest rates, etc.? You've got the US dollar weakening. This is something I don't think everybody fully understands, but the US dollar in the first half of 2025 fell by over 10% relative to other currencies. That is the biggest half-year drop in the US dollar since 1973, so more than six decades.

It's very significant for a number of reasons I won't get into, but not the least of which is that investors around the world are now starting to doubt whether the US currency can continue to be the reserve currency for the global financial system. You've got stretched equity valuations, especially in the US market.

The S&P 500 is now trading at 23 times earnings, which is very high in a historical context. You have persistent inflation worries. You've got high bond yields, which is causing the carrying cost for corporations borrowing money to be higher than it has been in the past.

You've got strains with the consumer. Right now in the US, as an example, the delinquency rate on consumer debt at US banks has increased for 14 straight quarters and is now close to—or maybe at—a 10-year high. So there's a long list of things that investors are worried about and that we are thinking about on a daily basis.

Why Markets Are Up When the News Feels Bad

Maria: Right? So this seems a little counterintuitive to my question. Why is everything so high right now? Equity markets are really high, but there's a long list of issues. So why do investors in the markets not seem overly concerned?

Paul: It's a really good question and something that is perplexing a lot of investors right now. The volatility level of the US stock market, as measured by the CBOE VIX Index, is at a level consistent with an economic environment where you would think nothing is going on.

In fact, we are pretty close to—not an all-time low—but a low in volatility in the equity markets since before COVID in 2020. There is a lot of complacency in the market right now. As you mentioned, stock markets are hitting an all-time high just this week—both the US stock market, as represented by the S&P 500 or the NASDAQ, as well as here in Canada, the TSX Composite Index. They're all hitting new all-time highs.

So what's going on? Putting aside all those worries I just mentioned, which are definitely important to think about, there's actually a lot of good going on right now. For one thing, on tariffs—certainly here in Canada, we're worried about what's going to happen on August 1st—but the US is actually coming up with some trade deals with different countries.

The US and the UK entered into a trade deal recently. Just in the last few days, a trade deal was entered into with Japan.

Maria: I saw that.

Paul: The EU is a possibility next. Not sure exactly how that's going to play out, of course, but there seems to be a lot of movement on the trade front, and all of that is quite positive. That is, having everybody's anxieties kind of reduces a little bit as to how damaging President Trump's new trade policies are going to be on the markets.

Despite tariffs and inflation still being a concern, we are dealing with a global disinflationary trend. Outside of the US, inflation isn't completely under control, but it is cooling much faster than a lot of investors were expecting. That gives central banks in Europe and elsewhere room to ease. In fact, in the Eurozone, inflation has been at or below the 2% target rate for the last couple of months.

It's not a long period of time, but it is a start. Probably most importantly, as it pertains to the equity markets, it is corporate earnings. The corporate earnings environment continues to be very strong. Today is July 24th, and we're just getting started in the second quarter earnings season. But so far this quarter, about 85% of publicly traded companies are beating the consensus estimates for both revenue and earnings per share.

Analysts have earnings per share in the US growing at about a 9% rate in 2025, and about 14% in 2026. Combined with that, corporate profits are pretty close to an all-time high right now, so a lot of the dynamics that dictate where stock prices should be are looking very, very good.

On top of that, consumer spending has been surprisingly resilient despite the strains that consumers are experiencing and despite the worries about the global economy. Consumer spending continues to be—not amazing—but very strong in the US. With the US consumer representing 70% of the US economy, as long as consumer spending stays strong, that should be good for corporate revenue and, therefore, corporate profits.

Consumer confidence is actually rebounding. A couple of months ago, at the beginning of this whole tariff issue, consumer and business confidence plummeted.

Maria: Everybody's kind of taking a breath now.

Paul: They are taking a breath, and that's translating into some of the confidence numbers. Confidence is also pretty high because the unemployment situation is still pretty good. It's not as great in Canada as it is in the US, but the US unemployment rate is pretty close to an all-time low. That, of course, is going to play through into consumer confidence numbers, and that in turn is influencing consumer spending.

There are still a lot of very positive things that investors can look at right now, and that do suggest that the highs in the equity markets are not necessarily irrational.

Is a Recession Still on the Table?

Maria: So we do hear some comments still that we might still head into a recession this year. What do you think is the risk of that? We've just talked about some of the strengths in the market. Do you feel like that's unlikely? Maybe it is more likely? Why? Where's the disconnect between these high equity valuations and this concern that we might have a recession this year—that we're not growing as we should be?

Paul: Yeah, no, it is a really good question. The recession risk is off the table. There is still a risk of recession—more so here in Canada than in the US—but even in the US, there are still some economists and other large investors who believe we might be headed into a bit of a recession.

In fact, in the US in the first quarter, technically, the US economy contracted. That was just because there was this massive surge of imports into the US as retailers and others were actually bringing in product, trying to get ahead—

Maria: Of the tariff issues.

Paul: Exactly. The way the GDP calculation is done is a net negative to GDP growth.

So the US had a pretty big negative print for the first quarter, but that's going to reverse itself significantly in the second quarter, which just ended. You're going to see a big rebound in GDP growth in Q2, and most investors and economists are expecting not terrific, but not bad economic and GDP growth in the US for the remainder of this year and throughout 2026.

We don't believe you're going to see this massive economic boom in the US like some would suggest, but we do think that growth in the US could be moderate and quite positive for the next, call it, six to eight quarters.

Now, in Canada, we are in a bit of a different situation. In Canada, we are feeling the effects of the tariff situation.

Maria: Employment's not as good.

Paul: Employment's not as good in Canada. It has stabilized a little bit recently, but it is at a much higher level than it is in the US. Exporters exported a lot fewer goods in the last few months into the US than is typically the case, for obvious reasons. All of that is translating into GDP growth that is not as good here as it is in the US.

In fact, the Canadian Federation of Independent Business just this morning came out with their quarterly report, where they said that right now we are in a recession. In the second quarter, they anticipate Canadian GDP growth to have been negative 0.8%, and then to be negative 0.8% in the third.

We don't necessarily believe that that's the case, but whether or not we're in a recession right now, I think it's going to be more of a technical thing. Are we negative for two quarters in a row, or do we actually have a positive print in either the second or third quarter? So technically we might be in one, but I do think there's a lot of evidence that suggests that in the second half of this year, going into 2026, we're going to see some positive growth here in Canada.

Once again, similar to the US, it's going to be modest, but it will still be fair—positive, we believe. That should support continued corporate profits.

Maria: So what does this mean for stocks? I mean, obviously we're just projecting, but—

Paul: Yeah. So the stock market is fairly different depending on what country or what asset class you're looking at.

Maria: You see the divergence.

Paul: You're seeing a pretty significant divergence. In the US, as an example, in our equity funds, we're underweight US equities relative to our benchmark. That's just because the US market is very highly valued right now. I mentioned earlier 23 times earnings—that gives you an earnings yield of about 4.3%, which is just about the same as what you can get on a 10-year risk-free US government bond.

Usually, equities do not trade at the same valuation as bonds. There is this thing called the equity risk premium, where you want a little more—but nowadays, there is no equity risk premium in the US.

So, looking at the US market as a whole, it is not looking like great value. Now, having said that, even in the US, we believe there are opportunities. For instance, so far this year, the US stock market has been driven by growth and momentum stocks—think Nvidia or Google. The growth and momentum indices are up anywhere from 10 to 20% so far year to date in the US, whereas value stocks, high-quality stocks, especially those companies that pay good dividends—

Maria: The blue chips.

Paul: The blue chips are up maybe 5–6%, and actually, in Canadian dollar terms, are negative because the US dollar has weakened so much.

Maria: It's easy to forget.

Paul: It is easy to forget. When people are talking about the US market, they're often thinking about Apple, Tesla, and Nvidia. They're forgetting there's this whole other segment of the market where you can still find pretty good value.

We're a value manager at Capstone, and we believe there are opportunities to profit by investing in the US market. You just have to be a little more selective right now. And certainly in Canada and other countries, such as those in Europe, we believe there's a lot more value. So we're a little bit overweight in those geographies.

Right. So you have to be picky. You have to pick your price point and really make sure that you're not paying too much for what you're trying to invest in.

High Valuations, Big Names, and the Nortel Flashback

Maria: Yeah. Okay. So let's maybe transition a little bit. We saw a post on LinkedIn that you did recently regarding Nortel Networks. Do you want to talk a little bit about that? That's interesting.

Paul: Yeah. Sure. It is interesting. Twenty-five years ago this week, Nortel Networks hit its all-time high. It was $124.50. The reason I remember that is because 25 years ago, I worked in downtown Toronto, and Nortel Networks was the talk of the industry. You could not have a client meeting or a meeting with an investment manager without talking about Nortel.

Clients wanted to talk about Nortel. Twenty-five years ago, the internet was booming. It was the modern-day gold rush. Nortel, which was the dominant supplier of networking gear, was the ultimate picks-and-shovels play to take advantage of all this capital spending that was happening related to the dot-com boom.

At its peak, Nortel hit a market capitalization of $250 billion US. To put that in perspective, at the time, it was close to 37% of the TSE 300 Index, which was the benchmark here in Canada at that time.

Maria: It was massive.

Paul: It was massive. Even investment managers that hated Nortel stock could not afford not to own it, because it would present a lot of career risk if they were underweight a massive amount of this one hot stock. If it kept going up, they were doomed to underperform the benchmark.

The reason I brought this up on the 25-year anniversary is because I see a lot of parallels with what you're seeing right now with Nvidia. Now, I don't want to suggest that Nvidia is going to follow the same path that Nortel did—

Maria: Yeah, so we're not suggesting that it's on the same track, but in terms—simply—of valuations, right?

Paul: In terms of valuations, and just in terms of the comments that I get from clients, “Nvidia is just at the beginning of this AI boom. How can you not be invested in Nvidia?” The growth is just getting started. You want to get on the train now. I heard all those same things 25 years ago with Nortel.

Again, to put things in perspective, Nortel peaked at $250 billion US. Nvidia is now 17 times that—it is $4.2 trillion US in market cap. That is bigger than every single publicly traded company in Canada combined. It is bigger than the GDP of Canada. It is bigger than the GDPs of Japan, of the UK.

Maria: Is that right? So it’s big.

Paul: It's really, really big. It's massive. Nvidia is a fantastic company doing a lot of really good things. Terrific leadership. It truly is at the forefront of this AI boom. But it’s a really good reminder—certainly the Nortel experience is a good reminder—that trees don't always grow to the sky. In fact, they never grow to the sky.

Just because Nvidia has been an absolutely amazing stock to own does not mean that today it is the best opportunity for the next year, five, or ten years. Investors really do need to think about diversification in their portfolios and think about diversifying into stocks that perhaps offer much better value than something that's at $4.2 trillion.

Maria: Excellent reminder. Nice poem. Well, I think we're going to leave it there. Thank you so much, and hopefully you've enjoyed this version of Your Wealth Matters. We will be tuning in to see you again soon. If you have any questions or if you have any topics that you hope we cover in one of these sessions, please feel free to reach out to us. We would love to hear from you. For now, bye.

Paul: Thanks very much.

The second quarter of 2025 has reminded us that markets don’t always move in sync with headlines. Despite persistent risks—from geopolitical instability to inflation and weakening currencies—opportunities still exist for those who stay disciplined and selective. Whether you're re-evaluating your equity exposure, considering geographic diversification, or concerned about valuations, having a thoughtful investment approach is important.

If you have questions about how recent developments could affect your portfolio, or you're looking for a second opinion, the Capstone Asset Management team is here to support you. Reach out for customized advice, and be sure to join us for the next episode of Your Wealth Matters as we continue to help you make sense of the markets and plan with confidence.