Over the past few weeks, U.S. stocks, as measured by the S&P 500, have experienced a correction—defined as a 10% fall in prices from their peak.
Unpredictable U.S. tariff policy, retaliation by trade partners and deteriorating consumer confidence have led to concerns about a U.S. recession. But is the outlook really that dire? While we acknowledge the risks, let’s take a closer look and see why the economy may be more resilient than it seems.
Revisiting Our Views at the Start of the Year
Entering 2025, we anticipated a year defined by slower global growth, shifting U.S. trade policies and continued monetary policy adjustments. Our outlook acknowledged heightened inflationary pressures, persistent geopolitical tensions and the structural issues facing major economies, including China and the Eurozone. Despite these challenges, we projected global gross domestic product (GDP) growth of approximately 3%, a level sufficient to support equity markets and risk assets (Navigating the global economic landscape in 2025).
In the U.S., higher-than-expected inflation and slower GDP growth were expected to define the economic landscape, although strong household and business balance sheets were seen as key buffers against a deeper slowdown. Meanwhile, Canada was forecast to experience modest growth benefits from early rate cuts, though trade uncertainty and slowing immigration trends posed challenges that could cap growth around 1.5% by 2026. Emerging markets were expected to see gradual slowdowns, with India remaining a relative bright spot (Navigating the global economic landscape in 2025).
Fast forward to March: much of that outlook remains intact, albeit with increased risks. The tariff-driven economic slowdown and weaker business sentiment have led to downward GDP revisions. However, the latest activity data suggests a more resilient economy than initially anticipated. February retail sales showed stronger-than-expected growth, with control group retail sales rising by 1.0% month-over-month, significantly better than prior estimates of an 0.8% decline that was suggested by the Chicago Federal Reserve CARTS data.1 Additionally, industrial production and housing stats showed signs of recovery, prompting a revision of our Q1 GDP estimates from -1.0% to 0.3%. While trade remains a drag on growth, we expect that net trade headwinds will reverse in Q2, supporting economic momentum.
Trade uncertainty and its market implications
The most significant development in Q1 has been the escalation in trade tensions. The U.S. administration has introduced 25% tariffs on steel and aluminum from Canada, prompting swift retaliation from trade partners. Historically, tariff uncertainty delays business investment and weakens consumer confidence, both of which are materializing now. The Bank of Canada’s March policy update warned of “a sharp drop in consumer confidence and a slowdown in business spending as companies postpone or cancel investments.”2
The impact on equity markets has been pronounced. The S&P 500’s correction has been led by high-valuation technology stocks, which have fallen 15 to 20%, while cyclical sectors have underperformed defensive sectors. Despite the sell-off, we maintain our view that U.S. equities will recover once macroeconomic fears abate. Historical precedent suggests that “growth scares” driven by trade fears often reverse once underlying economic data stabilizes.
Market Implications of Market Corrections and Recession Trends
The historical relationship between market corrections and recessions suggests that equity drawdowns often anticipate economic downturns, but not all stock market corrections lead to full-blown recessions. The recent correction in the S&P 500 aligns with historical market corrections that have occurred amid rising inflation and trade policy uncertainty. Historical market corrections that coincide with economic slowdowns typically see equity losses of 25-30% before stabilization. However, during stagflationary periods, equity drawdowns have been more prolonged, with slower recoveries. Stagflation – a combination of slow economic growth, persistent inflation, and elevated unemployment – typically results in muted earnings growth and restrained market performance, making defensive positioning crucial.
In addition, the nature of market corrections varies depending on the broader economic backdrop. Corrections triggered by financial instability – such as the 2008 Global Financial Crisis – tend to result in deeper and more sustained equity losses, whereas those associated with inflationary or trade-driven slowdowns often recover more quickly once macroeconomic uncertainty subsides. The current correction shares characteristics with past episodes where inflationary pressures and restrictive trade policies dampened sentiment, leading to weakness before eventual stabilization.
Moreover, sectoral performance during market corrections varies significantly. Defensive sectors, including consumer staples, healthcare and utilities, have historically outperformed broader indices during stagflationary periods, while growth-oriented technology stocks experience heightened volatility. However, we do not expect this stagflationary period to persist long term. The combination of Federal Reserve rate adjustments, easing trade tensions and improved business investment could help shift the economy back toward a more balanced growth environment.
With the ongoing market uncertainty, we have emphasized sector diversification across our portfolios to mitigate downside risk while maintaining long-term exposure to cyclical recovery opportunities.
Despite the correction, we maintain our long-term constructive stance on equities, particularly as economic fundamentals remain stronger than initial pessimistic forecasts suggested. While heightened volatility is expected, history suggests that market corrections tied to trade-driven slowdowns tend to recover more quickly than those driven by financial crises or structural downturns.
Portfolio Positioning and Investment Strategy
While trade tensions and recession fears have dominated Q1, we continue to believe that 2025 will be a year of slower but positive growth, with opportunities emerging as policy uncertainty clears. Investors should remain patient, disciplined and focused on long-term objectives.
From an asset allocation perspective, we continue to emphasize diversification across asset classes to manage risk and capture potential opportunities. Our positioning remains constructive on U.S. equities, particularly in sectors with strong earnings visibility and pricing power. However, we maintain a cautious stance on Canadian and European equities, given weaker economic fundamentals and ongoing policy uncertainty.
We also advocate for increased exposure to private credit and liquid alternatives, which can offer attractive yield opportunities and downside protection in periods of heightened volatility. Additionally, multi-factor and diversified equity strategies remain an important component of portfolio construction, helping investors navigate shifting market dynamics with a balanced approach to risk-adjusted returns.
While volatility is expected to persist, disciplined portfolio positioning focused on quality assets, defensive allocations, and alternative strategies should allow investors to navigate market uncertainty while remaining well-positioned for long-term growth.
Sincerely,
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management
- Chicago Fed Advance Retail Trade Summary: Current Data - Federal Reserve Bank of Chicago.
- Bank of Canada reduces policy rate by 25 basis points to 2 3/4% - Bank of Canada
The views expressed in this commentary are those of Canada Life Investment Management as at the date of publication and are subject to change without notice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances. The content of this material (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.
This material may contain forward-looking information that reflects our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of April 1, 2025. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.
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