December 18, 2025 |
| With the turbulence of trade wars, it is hard to believe that all major equity markets are strongly up year-to-date.1 It is a reminder that the market and GDP growth are not necessarily the same. Canada was arguably in a recession, yet the S&P/TSX consistently made new highs.1 Nearly 13% of the Canadian market is in gold stocks that continued to make new highs with gold exceeding $4,000/ounce2 which is a reminder that the market is ultimately driven by earnings. With worries over tariffs, margins in the US actually expanded every quarter in 2025 with earnings growing an astounding 16% YTD.3 This was even before the U.S. Federal Reserve (“Fed”) started lowering interest rates in September. This leads us back to the #1 rule of investing, “Don’t fight the Fed”. After three rate cuts in 2025, the market is expecting another 2-3 Fed rate cuts in 2026 which could be revised down with better than expected labour market data.1 Owning the market during Fed cuts has typically been a profitable trade, as shown in the chart below. |
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Fed Policy, Interest Rates, and Market Implications
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| The following chart shows the valuation range for the different markets around the world. |
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Although valuations in the US appear high, the high valuations tend to be in the Magnificent 7 that have substantially higher growth versus the S&P 500 Equal Weight Index. History has shown that when earnings growth is greater than the median (around 7-8%), P/E valuations are unlikely to contract.5 Therefore, returns should be approximately EPS growth + dividend yield. Given the double-digit earnings growth across many sectors and regions and relative valuations, we expect returns to broaden out beyond the Magnificent 7. There is also the potential for multiple expansions outside of the US. Overall, this should lead to solid double digit stock market returns in 2026.
The Shift Toward DeregulationSentiment towards Europe is improving as the bloc is coming to the conclusion that they are less competitive than other regions. Read more about it in our Europe Insights.6 This highlights one of the newer themes in the market: deregulation. Ever since the Great Financial Crisis, the burden of higher capital levels and compliance have increased. Brompton believes capital levels have peaked and the financial sector has substantial tailwinds.7 The environment in both Canada & the U.S. to build infrastructure will continue to improve. In Canada, the government is trying to diversify its trading partners and increase GDP growth per capita, while in the US, tech leaders continue to build AI infrastructure.8 Artificial Intelligence: The Next Industrial RevolutionBrompton believes Artificial Intelligence (AI) is the next Industrial Revolution and we are still in the early innings.9 There will be more drawdowns like the DeepSeek selloff in March 2025, but we believe this is a long-term theme with AI winners moving through the value chain. It started with Nvidia to data centres to AI infrastructure to software. We expect AI infrastructure to be one of the biggest beneficiaries since this is currently the biggest bottleneck, particularly on the electricity side. This is detailed in our AI infrastructure Insights.8 These bottlenecks are expected to take years to resolve and we expect some of the benefits to start accruing to the AI adopters. These are starting to show up in improving margins and sales per employee. |
| 1Bloomberg, as of December 8, 2025. 2Bloomberg, as of December 10, 2025. 3Bloomberg, as of September 30, 2025. Based on earnings for the S&P 500 Index. 4Bloomberg, as of December 8, 2025. OECD Economic Outlook for World GDP Growth. 5Morgan Stanley, November 17, 2025. 6Brompton Funds, April 8, 2025. Why Europe is Poised for a Resurgence 7Brompton Funds, August 18, 2025. A New Era for U.S. Banks 8Brompton Funds, December 12, 2025. Infrastructure Spending Goes Into Overdrive 9Brompton Funds, November 17, 2025. The Trillion Dollar Question – Are We In an Artificial Intelligence Bubble? This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. The opinions contained in this report are solely those of Brompton Funds Limited (“BFL”) and are subject to change without notice. BFL makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, BFL assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. BFL is under no obligation to update the information contained herein. The information should not be regarded as a substitute for the exercise of your own judgment. Please read the annual information form or prospectus, as applicable, before investing. Commissions, trailing commissions, management fees and expenses all may be associated with exchange-traded fund investments. Please read the prospectus before investing. Exchange-traded funds are not guaranteed, their values change frequently and past performance may not be repeated. You will usually pay brokerage fees to your dealer if you purchase or sell shares of the investment funds on the Toronto Stock Exchange or other alternative Canadian trading system (an “exchange”). If the shares are purchased or sold on an exchange, investors may pay more than the current net asset value when buying shares of the investment fund and may receive less than the current net asset value when selling them. There are ongoing fees and expenses with owning shares of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in the public filings available at www.sedarplus.ca. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Information contained in this document was published at a specific point in time. Upon publication, it is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. Certain statements contained in this document constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to matters disclosed in this document and to other matters identified in public filings relating to the funds, to the future outlook of the funds and anticipated events or results and may include statements regarding the future financial performance of the funds. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances. |
Laura Lau
Chief Investment Officer
Laura Lau has over 25 years of experience in financial services. Ms. Lau leads Brompton’s portfolio management team that oversees assets of approximately $3 billion primarily in global and Canadian covered call mandates designed to generate income and lower volatility of returns. She frequently shares her views of financial markets on Business News Network (BNN) and publications such as the Globe & Mail and Reuters.
