Jimmy Jean, chief economist Desjardins, poses outside offices in MontrealChristinne Muschi/Christinne Muschi/The Globe and
Equity markets have been remarkably resilient in the face of macroeconomic headwinds. Year-to-date, the S&P/TSX Composite Index has closed at a record high 52 times as markets continue to climb a wall of worry. Pullbacks have been short-lived, presenting buying opportunities for investors.
On Oct. 9, I spoke with Jimmy Jean, chief economist and strategist at Desjardins Group, for a two-part interview to discuss his latest economic forecasts and what it could mean for equity investors. In part two of this interview, presented below, Mr. Jean shares his views on where he sees markets headed, what to watch for this earnings season, weighs in on the AI bubble debate, and discusses what he considers to be the best investment for portfolio protection. In part one from earlier this week, Mr. Jean provided an update on his outlook for interest rates and the Canadian dollar and discussed Budget 2025, CUSMA renegotiations and potential risks to his economic forecasts.
Rate cuts by central banks combined with solid earnings growth have supported the market rally. What are your expectations for this earnings season?
We think that a big area of focus will be the impact of tariffs and how it is affecting margins, especially in the manufacturing and industrials sectors.
When we looked at the realized tariff rate versus what was advertised, it’s been lower. Part of the reason is that the U.S. customs agency, the CBP [Customs and Border Protection], has had trouble fully adapting but we expect that to improve so more companies will be affected. Also, when the inventory buildup diminishes, the impact of tariffs is going to start showing in new orders, the cost of new orders and we will see how that pinches margins. I think this is just the start of a theme that we will see in future earnings seasons.
I think the other thing that will be a focus is the consumer and consumer-related sectors. We’re going to be using that as a gauge, separate to the official data that we have on hand, but a gauge of consumer appetite, including consumer appetite to handle price increases. Also, whether companies are feeling that they can push prices higher, which we don’t think so, or whether they’re taking it more to the margins, which is what we’ve seen so far. I think that will be a key theme.
Then, I think it’s going to be about, in the U.S. in particular but also in Canada, the sectors that are not really impacted by tariffs. Obviously, in the U.S. it’s AI. AI spending has been extremely high, but in terms of the payoff from those investments, it’s still an open question. So, I think that’s also going to be an important theme.
Is this earnings season going to be a solid one that helps lift major North American stock markets?
We’ve seen a very robust beginning of the fourth quarter. Generally, the fourth quarter tends to be very solid, and we expect that pattern to continue into year end. Obviously, this week the market is struggling a little bit.
Regardless of valuations and the pushback that you hear all the time, markets keep rallying.
You have gold stocks that are benefiting tremendously from central bank buying and all the uncertainty. You have defense stocks that have done remarkably well and given the geopolitical environment, regardless of the peace deal in Gaza, there’s still some flashpoints elsewhere. I think that gold is going to remain well bid.
And the AI story is not dying anytime soon. If we were to get into a bear market at this point, the current bull market that we’re in would be the shortest that we’ve had since 1958. You hear about bubbles - we think if it’s a bubble, it can run for many more years and that’s what we typically see, so we’re still constructive on the market.
We are three years into this bull market, and you said if it were to end, it would be the shortest bull market since 1958?
When we look at the monthly data for the S&P 500, what we see is that in 2022, we had a slight bear market, but after that the market didn’t look back.
The market rallied for 152 months before the dot-com bubble burst, and right now we’re 35 months into the current bull market.
Now, there’s many things to it. If Donald Trump causes significant disruptions that could still lead us there. But from a historical perspective, there’s nothing that screams that we’re due to get into a bear market.
So, you don’t believe we’re in an AI bubble?
The question of whether we’re in a bubble is not clear cut because some companies are in much better positions when you look at their balance sheets and liquidity compared to what dot-com companies had back then.
And I think in terms of AI adoption, we’re still at the early stages of it. Disruptive innovation takes a number of years before companies really figure out the best ways to leverage it and to gain efficiencies from it. It’s not clear that companies have reached that turning point just yet. But, more and more, you’re going to see productivity gains from companies and the payoff will come at that point. And, when it starts to hit their earnings, there’s no way the market is going to pull back, I think.
In a report that you published last month, your 2025 year-end targets for the S&P/TSX Composite Index and the S&P 500 were 30,250 and 6,800 respectively. Given that these indices are above or near your targets, do you believe your targets may prove to be too conservative or do you believe markets are fully valued?
Our forecasts embed some level of volatility, the likes of which we’re seeing right now, that’s why we don’t have them continuing in a straight line. We expect there to be a few setbacks along the way.
We’re embedding volatility but ultimately this market has proven to be very resilient. As well, you have the U.S. Federal Reserve cutting rates. When central banks are cutting rates, generally, it’s a positive for the market.
Your 2026 year-end targets are 33,600 for the S&P/TSX Composite Index and 7,400 for the S&P 500, which based on your 2025 year-end targets implies an 11 per cent return for the TSX and 9 per cent gain for the S&P 500. Why do you think the TSX will outperform, albeit slightly, in 2026?
We expect a few things. The TSX has a better starting point when it comes to valuations. As well, we think the TSX will be favoured given its distribution with it being more involved in materials and infrastructure for critical minerals, which we think over the next few years will be in high demand. And, there’s gold. We’ve seen how gold has played out this year and we think there’s going to be strong demand for gold in the current environment.
Also, Canada is likely to come out, more and more, as a beacon of stability on the social front and to some extent on the political front. We have a minority government but I think the signaling is going to be favourable when those projects get underway and some businesses benefit from it. Think about how Bombardier (BBD-B-T) will benefit from defense spending or MDA Space (MDA-T), there’s going to be a lot of value that will start getting unlocked that’s why we have the Canadian stock market performing better.
You have the U.S. with the highest GDP growth rate of the G7 nations with real GDP growth of 1.9 per cent in 2026. Also, you’re talking being in the early stages of AI adoption and the technology sector has a larger weighting in the U.S. stock market compared to Canada. Also, Canada is near the end of its rate-cutting cycle, but the U.S. Federal Reserve has many rate cuts anticipated. So, I would have thought you would see greater potential returns for the S&P 500 compared to the TSX.
It’s a good point but our sense is that the U.S. is still very richly valued. From a relative value perspective, global investors will start looking at how they can diversify away from the risk of seeing those valuations normalize a little bit and look at other markets that look more attractive, like Canada. We still have a constructive outlook for U.S. markets.
Where does the price of gold go from here?
Our year-end target is actually US$3,700, so we have gold going a little bit lower, but we’ve been revising that target up.
We assume the U.S. government shutdown will end at some point. Once that’s the case, we should see risk appetite return and given the extensive rally that we’ve seen in gold, maybe gold has gotten a little bit ahead of itself, so we think gold will be, at least on a temporary basis, more vulnerable, hence that lower end of the year target.
We still think that the fundamentals will be very much in favour of price appreciation. One of the reasons is that you’re not seeing supply of gold really move all that much. For miners, it’s very costly and difficult to add to capacity. For example, in Canada, you have issues surrounding labour shortages and regulatory costs, so some miners are just happy to be enjoying higher gold prices and not rushing to expand much more in terms of their capacity.
And the story that you’re seeing play out globally is that there’s a lot more demand, including from central banks, but also from all categories of investors, even retail investors through ETFs.
And lastly, what key takeaway on equity markets should readers take away from this conversation?
I think markets are discounting a lot of good news, but that’s been the case over the last several years. We’re seeing evidence that this is a market that’s much more resilient to negative news or shocks than anybody expected. And that speaks, as well, to many companies having business models where they’re still able to extract earnings and manage risks much more effectively than in the past or relative to what many analysts expected.
So, I would say, you don’t fight the Fed, and don’t fight the equity markets, either. I think it still has staying power. Although, I would say you still want to be cautious and have some protection and the best conduit for that protection, right now, is gold.
This Q&A has been edited for clarity.