Three stories, one lesson: fundamentals matter
Do tariffs really affect the TSX?
Canada-U.S. trade talks collapsed last Friday night, 50% Section 338 tariffs took effect Saturday and Ottawa answered on Tuesday, dollar-for-dollar. The concern for Canadian markets is understandable.
For investors, the impact on the broader market is likely far more limited than the headlines suggest, and the reason is composition. Materials, energy and financials make up roughly 70% of the TSX and should remain the primary drivers of returns over the next year. Gold sits largely outside the tariff net, energy is similarly insulated and Canadian banks are not exporters in the traditional sense. The Canadian economy and the Canadian stock market are not the same thing.
In fact, the S&P/TSX Composite Index has performed well this year not despite Washington’s policies, but partly because of them. The Iran war has kept oil elevated, supporting energy producers, while U.S. Treasury market intervention and concerns about fiscal sustainability (and U.S. dollar debasement) have been a tailwind for gold. This week made the point: the index rose Monday despite the tariffs and touched a record on Tuesday, with gold near $4,730.
We would draw the same distinction on the loonie. Trade uncertainty is an obvious near-term headwind, but currencies follow larger forces. If the price of oil stays firm and the Bank of Canada moves toward higher rather than lower rates, particularly as Canadian rates converge with U.S. rates, the fundamental backdrop could favour a stronger Canadian dollar over the next year.
None of this makes the trade dispute irrelevant. It creates winners and losers and would matter more if tariffs broadened materially. But the fundamentals still outweigh the noise.
Is the AI trade still alive?
Nvidia delivered a quarter that was hard to argue with. Revenue doubled to $96.2 billion, earnings more than doubled to $2.22 per share, gross margin expanded to 75%, and the guidance called for 70% growth next year. Jensen Huang, Nvidia’s CEO, said the constraint is supply, not demand.
Nvidia had fallen after six of its prior eight reports, including four in a row, not because results disappointed but because expectations were unbeatable. This time the stock rose and the Nasdaq climbed with it.
That completes a pattern running since June. Alphabet was punished for the bill, Meta for the margin, Microsoft rewarded for proof. Nvidia just cleared the highest bar in the market. The AI trade is not dead.
Will the Fed hold in September?
In the U.S., July’s Personal Consumption Expenditures (PCE) rose 0.2% monthly and 3.7% annually, both of which were above expectations. Core PCE inflation held at 3.3%, exactly in line, and that distinction helped. A mild upside surprise was not enough to shift the balance for September’s rate decision expectations.
The U.S Federal Reserve (the Fed) stays on hold is our guess, but trade policy is handing the Fed new price pressure yet again.
What's next?
September 2 brings the Bank of Canada’s interest rate announcement and Canadian retaliatory tariffs are set to come into effect on September 8. After a week when the chips delivered and the diplomacy did not, the question is whether the fundamentals that have carried the TSX all year will continue to outweigh the headlines.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
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