Expect FED and BoC to continue cutting rates: Adatia

Key Concepts

• Earnings Reports: Financial statements released by public companies detailing their performance over a specific period.
• Interest Rate Announcements: Decisions by central banks (like the Bank of Canada and US Federal Reserve) on benchmark interest rates.
• Tariff Deal: An agreement between countries to reduce or eliminate taxes on imported goods.
• AI Demand: The increasing need and adoption of Artificial Intelligence technologies by businesses.
• Inflation: A general increase in prices and fall in the purchasing value of money.
• Labor Market: The supply and demand for jobs and workers.
• USMCA Deal: The United States-Mexico-Canada Agreement, a trade pact.
• Bullion: Gold in its physical form, typically bars or coins.
• Put Options: Financial contracts giving the owner the right, but not the obligation, to sell an asset at a specified price within a specified time.
• Covered Call Strategies: An options strategy where an investor holds a long position in an asset and sells call options on that same asset.
• Fixed Income: Investments that pay a fixed rate of return, such as bonds.

Market Focus: Earnings and Fundamentals

The current market attention is primarily on earnings reports from high-profile companies. The guest, Sadi Adatia, Chief Investment Officer at Beimo Asset Management, emphasizes focusing on fundamentals and the "earning story" to cut through market noise. He notes that strong earnings can still drive stock prices higher, attributing this to factors like cost controls, alignment with other industries, and the fundamental operational health of companies. A key driver for revenue growth across the board is consumer demand.

Technology Sector Outlook

Technology companies are specifically highlighted as expected to deliver the strongest earnings again. This is largely driven by the AI demand and its impact on other industries. While there were earlier concerns about AI spending potentially exceeding immediate revenue returns, companies continue to invest, viewing AI as a strong growth engine for the future. Adatia suggests that AI's impact may not be about immediate job losses but rather a shift in hiring, with AI potentially replacing the need for new hires in the future, leading to increased efficiency. This forward-looking perspective on AI's benefits is driving continued company investment.

Interest Rate Outlook: Bank of Canada and US Federal Reserve

Adatia anticipates interest rate cuts from both the US Federal Reserve and the Bank of Canada. He notes that while earnings have been strong, inflation has not necessarily followed suit, alleviating a major concern for central banks. Although inflation may not drop dramatically, it is not expected to surge either, which provides room for rate cuts. The weakness in the job front also supports the case for rate cuts. Adatia believes that neither central bank would have waited this long to cut rates only to pause again, suggesting a continued move forward unless contrary data emerges.

Labor Market Dynamics

Regarding the labor market, Adatia acknowledges definite weakness but clarifies it's a shift from a "very strong healthy job market" to one that is "becoming less healthy," rather than a collapse. This ongoing strength in the labor market still supports consumer spending. While some pressure on jobs is expected over time, it is not considered imminent. This allows companies to continue seeing increased revenues and pass on some tariff impacts to consumers, leading to higher profits, even if there are minor pressures on margins. Lower interest rates in the future are expected to support valuations, preventing markets from appearing "exceptionally frothy."

Geographic Investment Tilt: US vs. Canada

Beimo Asset Management is overweight US stocks and neutral on Canada, particularly amidst the ongoing trade war. The US is considered the strongest economy with companies tied to key themes. In the short term, during tariff negotiations, the US is seen as holding a position of strength and likely to benefit from many of these deals, leading to continued buying of US goods. Economically, the US is on a stronger footing than Canada. The upcoming USMCA deal is expected to bring stability to Canada, allowing companies to plan and invest accordingly. However, for the present, the tilt is towards the US.

Gold Investment Strategy

Beimo Asset Management has been a strong proponent of the gold trade since September 2023, calling it one of their best trades and reallocating funds from fixed income to gold. However, they have also been prudent, pausing their overweight positions at times and implementing hedging strategies using put options to protect against downside risk, especially given gold's significant run.

Short-Term Caution and Long-Term Bullishness on Gold

While bullish on gold longer-term, particularly into 2026, Adatia advises caution in the short term. He suggests strategies like covered call strategies on gold or buying gold with put options, similar to their own approach. The expectation is for the rally to continue into the next year, driven by global uncertainty, potentially higher valuations, and a possible weakening of the US dollar in 2026. These factors are expected to favor gold, especially against fixed income, which has not seen significant outperformance. The current pause in gold's rally is seen as a short-term phenomenon.

Conclusion

The market is currently focused on corporate earnings, with technology companies expected to lead in strong results driven by AI demand. Central banks are anticipated to cut interest rates, supported by moderating inflation and a cooling but still relatively healthy labor market. Geographically, the US market is favored over Canada due to its economic strength and the short-term benefits from trade negotiations. Gold remains a favored long-term investment, though short-term hedging strategies are recommended due to its recent strong performance.