Bull and bear statues stand in front of the German stock exchange in Frankfurt, Germany, in February, 2019.Kai Pfaffenbach/Reuters
At 2024’s end, I confessed I couldn’t determine stocks’ likeliest 2025 path. Just as three 2025s looked equally likely: U.S. and world stocks could boom big again. Or dip slightly. Or eke out tiny gains. I expected clarity to come before long.
It did. So I’m sharing why. Expect a brighter-than-feared 2025, led by … Europe! Let me show you why.
Clarity came as I could measure that sentiment had soured too far, especially in Europe, where it is vastly uglier than reality warrants. That pessimism is bullish for markets – fostering positive surprise ahead. And surprise moves stocks most.
Previously, I said a third straight year of big gains would shock the most investors, given such streaks’ historical rarity. And that professional forecasters’ consensus view virtually never happens. Consider now: Of 62 professionals’ 2025 U.S. market outlooks, only two call for a gain of more than 20 per cent. Surprise power makes big returns likelier.
I also said the S&P 500 rose in 60 per cent of presidential inaugural years – typically delivering gains of more than 25 per cent when markets were up. Now, with business basics healthy, earnings will climb. High correlations and America’s huge footprint make this bullish for Canada and globally.
But my best basis for optimism? Europe’s excess pessimism. While most U.S. investors cheer the “pro-business” Republicans’ control of Congress and the White House, Europeans are completely tariffied by Donald Trump. Example? Trade-war fears dominated Davos as the U.S. President threatened tariffs on those countries not investing in America. February’s metals taxes and hype over possible “reciprocal tariffs” fanned similar fretting globally.
Canada knows these fears well. Beyond metals tariffs, fears have spiked with Mr. Trump’s 25-per-cent tariffs threatened on most Canadian goods and 10 per cent on energy.
Beyond tariffs, EU-wide political chaos and German and French economic weakness compound Europe’s malaise. It extends higher the “Wall of Worry” bull markets legendarily love to climb, paving the way for positive surprise as those worries subside.
European political uncertainty is high amid France’s shaky government and euroskeptics’ rise in Germany, Austria and across the EU. Canadian political uncertainty remains elevated as talk of March’s federal Liberal leadership vote and an impending national election hog headlines.
But all that looks backward. The rise of fringe EU parties scatters political support, delivering unwieldy coalitions – hence, bullish parliamentary gridlock. Anticipate elections and horse-trading creating this in France, Germany and across the EU, calming political fears. Little legislatively important will actually happen. Stocks love that quiet. The selection of a new Liberal leader should also quell uncertainty somewhat before the federal election brings more.
Europe envisions itself as a no-growth quagmire, dogged by “sick man” Germany and flagging France – while overlooking Southern European strength, including Spain’s quick fourth-quarter growth. Pessimism blinds many to reality. So, even minor eurozone growth will positively surprise – as it did in 2024.
Ditto for Asia, but less so. Sentiment is mixed there, partly underpinning Japan, Singapore and Taiwan’s bumpy 2025 stock market starts. Fearful commentators dismiss better-than-expected regional growth as fleeting, citing Chinese economic weakness and China’s and America’s tit-for-tat tariffs. That, despite Mr. Trump’s 10-per-cent China tariffs (and China’s retaliation) proving smaller than feared, plus China meeting its 5-per-cent growth target for 2024. Dismissed trends precede and power positive surprise.
Other Trumpian tariffs? They may never happen! Recall Mr. Trump’s first-term threats to cancel NAFTA? In the end, the agreement was just renegotiated with some minor changes and given a new name. Or the threats to tax EU and Japanese auto exports? Like many others, they were bargaining chips aimed at inking various “deals,” like the United States-Mexico-Canada Agreement.
Now looks increasingly like then – this time with 2025’s Canadian tariff threats and subsequent border security deal. Mr. Trump’s Mexican and Colombian deals mirrored this.
Even if Canadian tariffs come, they will sting less than feared. Yes, America is Canada’s largest trade partner, with about three-quarters of Canadian goods exports U.S.-bound – far above the EU’s modest 16 per cent.
But consider: If Mr. Trump’s varied tariff threats materialize, Canadian companies can cut costs or let U.S. importers pass on the costs of tariffs to their consumers. A quarter of Canadian exports to America are energy. Pipelines won’t run dry on a 10-per-cent tax. Metals tariffs? U.S.-bound Canadian steel and aluminum comprised less than 5 per cent of Canada’s total goods exports. Call it bad policy or boo the America-First mentality, if you like! But the economic effects? Smaller than feared, which is bullish for markets. And none of those threatened tariffs touch the more economically significant services sector, which accounts for 70 per cent of Canadian GDP.
These less-bad-than-feared unforeseen relief forces will power Canadian and world stocks – but especially Europe’s. It is why European stock markets led America through mid-February. And why German, Italian, Spanish and British stocks keep hitting all-time highs, despite all fears. And that Canadian stocks are up, despite the hand-wringing. Markets see all the widely touted negatives. They have prepriced them … and now advance.
To be clear: U.S. and Canadian stocks should do fine. But deeply dour sentiment means Europe shines brightest in an overall strong 2025.
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Publish date : 2025-02-20 10:59:00
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