After a chaotic start to Q2, financial markets seem to be catching their breath—and so is the investment team at National Bank Investments. In their freshly released Q3 2025 outlook1, Chief Investment Officer Martin Lefebvre and his team at National Bank Investments are cautiously dialing up their optimism. The reason? Less trade drama, a sturdy job market, and inflation that, so far, is playing nice. Their central call: a modest economic slowdown, not a recession.
As Lefebvre and his team puts it, “The fog is gradually lifting.”
From Jitters to Recovery
April opened with a bang—just not the good kind. “Equity markets began the second quarter in turmoil,” they write, after hefty reciprocal tariffs from the White House sparked fears of a global slowdown. But then came a sharp U-turn: “The Trump administration… adopt[ed] a more conciliatory tone,” which triggered a relief rally that erased the initial dip.
Canadian equities led the way up, helped by a stronger loonie. U.S. and global markets followed suit. Bonds, on the other hand, struggled to find their footing. As they note, “Despite heightened uncertainty, the Canadian fixed income universe ended the period with slight losses as investors questioned the path ahead for interest rates.”
What’s Behind the Turnaround?
Three main forces are driving the shift in tone:
- Resilient U.S. economy: “The labour market is still on track, corporate earnings remain relatively strong, and inflation shows no signs of re-accelerating so far.”
- A clearer White House playbook: “Although there is still some underlying anxiety among consumers and businesses, confidence surveys have quietly begun to improve as the parameters of the White House's policy agenda become clearer.”
- Tax cuts kicking in: While the so-called “One Big Beautiful Bill” hasn’t reined in the U.S.’s debt problem, it’s not all for nothing. “The Trump administration's proposed tax cuts should begin to provide some stimulus to the economy starting at the end of the year.”
Risk-on—but Just a Bit
Lefebvre’s team isn’t popping champagne just yet. But they are nudging their asset allocation in a slightly more constructive direction.
“While uncertainty remains high,” they explain, “the gradual dissipation of the political fog is nevertheless revealing an improvement in the balance of risks compared to the last quarter.” That’s given them “greater confidence in our base case scenario of a modest economic slowdown.”
What changed in portfolios?
“Although the risk level of our asset allocation strategy remains moderate ahead of what is likely to be a volatile summer, we increased our equity allocation relative to bonds at the end of May. Within equities, we raised our allocation to Emerging Markets from underweight to neutral.”
Translation: they’re leaning into equities—especially those in developing markets—but still keeping a close eye on volatility.
The Base Case: Tepid Growth, Soft Landing
The NBI CIO Office assigns a 70% chance to a “sub-trend growth” scenario. Here’s what it looks like:
- Real GDP in the U.S. grows between 1–2%
- Unemployment edges up to around 4.5%
- Inflation stays stuck near 3%, thanks to tariffs
- The Fed resumes cautious rate cuts
- The Bank of Canada adopts a slightly accommodative stance
- Global fiscal policies provide a helpful cushion
What does that mean for markets?
“↑Equities, ↕Bond yields, ↓Volatility, ↓USD”
So, expect equities to continue climbing, bond yields to bounce within a range, and the U.S. dollar to weaken slightly.
Not Out of the Woods: Bull and Bear Scenarios
Even as they lean into risk, the CIO team remains aware of what could go right—or terribly wrong.
Bull Case (10% Probability)
- Stronger-than-expected GDP growth (>2%)
- Robust job market
- Inflation behaves despite tariffs
- Big trade deals ease uncertainty
- Businesses and consumers stay confident
Result? “↑Equities, ↑Bond yields, ↓Volatility, ↓USD”
Bear Case (20% Probability)
- The job market falls apart
- Inflation drops, but tariffs keep it sticky
- Trade talks break down completely
- The “One Big Beautiful Bill” gets stuck in Congress
- Consumers retrench, Fed scrambles to ease
Market impact? “↓Equities, ↓Bond yields, ↑↑Volatility, ↑USD”
The takeaway? Risks remain—but they’re more balanced than before.
Eyes on the Horizon
Two major storylines will shape the road ahead:
- Trade deals: “Beyond the trade agreements that the U.S. is hoping to announce in the coming months, we will also need to closely monitor…”
- The Fed’s tone: “…the Fed's policy outlook, as a more dovish stance cannot be ruled out, provided that inflation continues to cooperate.”
Lefebvre’s team isn’t ruling out a pivot in strategy if the data—or geopolitics—suddenly shift course.
Bottom Line: Cautious Confidence
While the landscape remains unpredictable, the fog is lifting just enough for National Bank Investments’s CIO Office to see a path forward. It’s narrow. It’s still a little slippery. But it’s there.
“Stay nimble, stay diversified, and stay informed” is the clear message. Because even if the weather’s improving, it’s still smart to keep your raincoat handy.
Footnote:
1 NBI CIO Office. "The fog is gradually lifting." National Bank Investments, 25 JUne. 2024.
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