The theme of the previous Canso Market Observer was that no one could predict the outcome of Trump’s tariff war – and alas, the Canso July 2025 Market Observer tells us that’s still the case.
“The more expertise you possessed, the less you were probably able to forecast the actual outcome,” the newsletter says.
What fascinates Canso, and honestly all of us, is the equity market’s relentless optimism in the face of global chaos. Despite multiple wars, trade turmoil, and the unpredictability of Trump’s second term, investor enthusiasm hasn’t wavered. In fact, equity markets seem to be thriving on the uncertainty.
“It is often said that uncertainty is the enemy of the financial markets, but it now seems to feed their upwards frenzy,” Canso writes.
Markets vs. reality
After a sharp drop in April triggered by Trump’s “Liberation Day” tariffs, the S&P 500 has not only rebounded – it’s surpassed past previous highs. Other global indices have followed suit, as investors appear to be leaning into what some Wall Street executives have dubbed the “TACO” trade (Trump Always Chickens Out).
This is the belief that Trump’s bold threats are more bark than bite, and that he’ll retreat from disruptive policies if it causes market disruption.
However, despite the equity market’s enthusiasm, the bond market tells a more cautious story. The long U.S. Treasury yield soared towards 5% in June, as concerns around a trade war with China, inflation, ballooning U.S. deficits, and Trump’s public pressure on the Fed are all putting stress on long-term rates.
“Trump’s bond problem-solving proved to be temporary.”
Canso writes, highlighting that bold statements can only go so far when the underlying fundamentals continue to flash warning signs.
Canada’s tightrope
Canso takes a critical look at Canada’s precarious position under Prime Minister Mark Carney. Elected on an “Elbows Up” promise to push back against Trump, Carney now seems to be treading more cautiously. Tariff retaliation has been shelved, the Digital Services Tax was quietly dropped, and the U.S. response was blunt: Canada and Carney “caved.”
While the Carney government spun this as tactical negotiation, Canso questions whether “Elbows Up” is turning into “Turtling”.
Canada’s deep reliance on U.S. trade, with 90 per cent of some Canadian production bound for American markets, leaves little negotiating power, especially under a U.S. president who, as Canso puts it, “respects power” and may not view Canada as a real player.
Domestically, Carney faces his own challenges: minority government status, budget constraints, housing market weakness, and finding a balance between social spending and the necessary support programs to tariff-affected industries amid a slowing economy with vastly increased defence spending.
Caution ahead
While markets may be ignoring the risks, Canso clearly isn’t.
“When things are very expensive with this much uncertainty, then it is time to take profits and watch cautiously from the sidelines,” the portfolio managers write.
We encourage you to read the full Canso July 2025 Market Observer for more insights and analysis on what’s going on in the markets.
