Tariff rates have continued to increase but are doing less damage than initially feared, and policy uncertainty has diminished as deals have been struck and outcomes are becoming clearer (Exhibit 1). That said, the average U.S. tariff rate has now increased to nearly 19%, up from 2% at the start of the year, and the economy is moderating slightly as the real impact from this import tax starts to become visible. Lending activity is slowing, job growth is decelerating, and the housing market remains under pressure (Exhibit 2). Overall, global leading economic indicators are consistent with slow growth, but not recession (Exhibit 3). Our base case is that economies manage to grow at a modest pace over the remainder of 2025, before accelerating into 2026 as tailwinds from fiscal and monetary stimulus offer support on a lagged basis.
Exhibit 1: Global trade policy uncertainty
Note: As of 08/21/2025. Shaded area represents U.S. recession. Index based on searches in economic, research and government related topics in Bloomberg News and First Word feeds. Source: Bloomberg, Macrobond, RBC GAM
Exhibit 2: United States - Monthly change in non-farm employment (3mma)
Note: As of July 2025. Source: Bureau of Labor Statistics
Exhibit 3: Global purchasing managers' indices
Note: As of August 31, 2025. Source: Macrobond, RBC GAM
Trade policy uncertainty reduced but other risks remain
Risks to the outlook are fluid and, while the tariff situation appears to have stabilized, deals could still be modified and new threats could surface at any time. On the geopolitical front, the war between Russia and Ukraine is ongoing and while peace negotiations are taking place, details of any cease-fire are uncertain. Another key risk is that governments are highly indebted, with plans to run further budget deficits, exacerbating the already precarious fiscal health among some of the world’s major economies (Exhibit 4).
Exhibit 4: Fiscal health by country
Note: Fiscal Health Index measures a country’s fiscal health on a scale of 1 (good) to 5 (extremely poor) and is constructed using a weighted average of various fiscal metrics. Source: Macrobond, RBC GAM calculations
Fed cuts imminent to support softening labour market
Against this backdrop, U.S. interest rate cuts may be imminent. Fed chair Jerome Powell recently emphasized that a softening labour market would outweigh near-term inflation pressures when it came to determining the course for short-term interest rates, believing that any tariff-related increase to inflation will likely be temporary. As a result, investors have grown confident that rate cuts are coming soon, and the futures market is pricing 50 basis points in rate cuts by year end, with nearly a 90% chance that the next 25-basis-point cut occurs on September 17 – the date of the next FOMC interest-rate decision (Exhibit 5).
Exhibit 5: Implied fed funds rate
Source: Bloomberg, U.S. Federal Reserve, RBC GAM
“At 4.2%, the U.S. 10-year yield is situated above our modelled estimate...”
Government bonds offer decent return potential, modest valuation risk
The U.S. yield curve has been steepening as investors price in rate cuts while long-term bond yields remain elevated as investors consider possible stubborn inflation and fiscal concerns. The spread between U.S. 2-year yields and U.S. 10-year yields has increased 30 basis points so far this year, effectively offering fixed-income investors greater return potential for deferring their savings over a longer period. At 4.2%, the U.S. 10-year yield is situated above our modelled estimate of equilibrium and represents decent return potential with only modest valuation risk, barring an inflation shock (Exhibit 6). We reach similar conclusions for most other developed-world government bonds.
Exhibit 6: U.S. 10-year T-bond yield
Note: As of August 31, 2025. Source: RBC GAM
Stocks more expensive but return potential compelling outside of North America and Japan
In equities, global stock markets extended their impressive rebound following Liberation Day (April 2, 2025) and many major indices have climbed to fresh records. The S&P 500 has rallied 30% from its April low, bringing its year-to-date gain to 10%, while the tech-heavy NASDAQ has outperformed slightly, up 11% so far this year (up 40% from its April low). Gains have been even better in non-U.S. markets. The MSCI Japan and MSCI Emerging Markets indices both gained 17% over the same period, while Canada’s S&P/TSX Composite rose 21% and MSCI Europe increased 22%, all figures in U.S. dollar terms (Exhibit 7). Our global composite of stock-market valuations suggest stocks are getting more expensive, although valuations vary widely by region and expensiveness is highly concentrated in U.S. mega-cap technology names (Exhibit 8). Outside of North America and Japan, stocks remain reasonably to attractively priced, especially in Europe and emerging markets, where return potential is compelling should economies and corporate profits continue growing at a modest pace.
Exhibit 7: Major indices' price change in USD - 2025 year-to-date
Note: As of August 29, 2025. Magnificent 7 includes Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. Source: Bloomberg, RBC GAM
Exhibit 8: Global stock market composite - Equity market indexes relative to equilibrium
Note: As of August 31, 2025. Source: RBC GAM
Scenario analysis suggests further upside in S&P 500 may be limited
To keep the bull market in the S&P 500 alive, where the Index is trading at more than one standard deviation above fair value, maintaining elevated investor confidence and sustaining strong earnings growth are both critical. Investors have been highly optimistic about artificial intelligence, a sentiment reinforced by earnings growth exceeding analyst estimates by a material amount. Helped in large part by mega-cap technology companies, S&P 500 profits grew 13.2% on a year-over-year basis in the second quarter versus expectations of just 5.8%. And even in the face of tariff headwinds, profit margins have continued to expand and profit forecasts have been revised higher as a result. Looking ahead, analysts expect S&P 500 earnings per share to rise 10.5% in 2025 to $267.55, and a further 13% in 2026 to $303.24 (Exhibit 9).
Exhibit 9: Earnings estimates and alternative scenarios for valuations and outcomes for the S&P 500
Note: As of September 2, 2025. Total returns for 2026 are annualized. Source: LSEG I/B/E/S, RBC GAM