Uncertainty abounds as the trade war threatens economic growth, complicates the outlook on inflation, and stokes financial-market volatility, causing investors to weigh a wide range of possible outcomes. In this environment, stocks are under pressure as investors shun expensive U.S. large-cap growth stocks in favour of those with more reasonable valuations.

Economy

• The heightened activity and lack of clarity around U.S. policy threatens to temporarily slow economic growth as businesses and households opt to delay key decisions.

• Recession risk is now substantial for Canada and Mexico, and has mounted a bit even for the U.S. where the probability of recession has jumped to 25% or more from 15%. Our developed-world growth forecasts have been nearly universally downgraded for 2025 and now rest somewhat below the consensus.

• Risks to these growth forecasts extend in both directions, mostly related to the ultimate intensity and duration of tariffs, in conjunction with the downside risk of greater geopolitical tensions.

RBC GAM GDP forecast for developed markets

Note: As of March 7, 2025. Source: RBC GAM

Fixed income

• The U.S. 10-year yield rallied to 4.21% at the end of February from a high of 4.80% earlier this year as investors sought safe-haven assets amid tariff threats and the potential negative impact on the economy. The key threat to fixed income investors would be an upside surprise to inflation caused by unfavourable trade policies, but that upward pressure could be offset by weaker growth conditions.

• We expect bonds to deliver at least coupon-like returns somewhere in the low-to-mid single digits over the year ahead, but with greater divergence across bond markets, reflecting their disparate economic outlooks.

U.S. 10-year T-bond yield

Equilibrium range

Note: As of February 28, 2025. Source: RBC GAM

Equity markets

• Stocks began to fall toward the end of February after reaching record levels earlier in the quarter as investors shied away from risk taking amid heightened uncertainty. The sell-off was concentrated in the most expensive U.S. stocks, whereas other markets which are more attractively priced, such as European equities, have delivered impressive gains so far this year.

• U.S. large-cap equities remain expensive and require continued strong earnings growth to support further gains. Stocks are vulnerable given their elevated starting point in the event tariffs prove long-lasting and earnings estimates get revised lower.

• Our return estimates range from mid- to high-single digit returns over the year ahead depending on the region, but large error bands exist around our central forecasts.

Major indices’ price change in USD

2024 and YTD 2025

Note: As of February 28, 2025. Magnificent 7 includes Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. Source: Bloomberg, RBC GAM

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