The third quarter of 2025 was marked by significant shifts in the economic and political landscape with the investment environment impacted by heightened market volatility, continued uncertainty over tariffs and escalating geopolitical risks. We’ve identified the following four themes:

• Slowdown in economic growth in both the U.S. and Canada reflected by weaker labour markets, declining business investment and lower consumer spending

The U.S. saw its GDP growth moderate and unemployment rise to 4.3%, while inflation continued to ease below 3%. Canada’s GDP grew at a subdued rate of less than 1%, with inflation nearing the Bank of Canada’s 2% target and unemployment reaching 6.1%. While Canada avoided a recession, consumer spending was tempered by high household debt, business investment was lacklustre, and resource exports faced mixed demand. Future GDP growth is expected to benefit from infrastructure spending and lower interest rates, contingent on the preservation of export exemptions under CUSMA agreements.

• Continued central bank easing with the U.S. initiating a 25-bps interest rate cut in September.

Both the U.S. Federal Reserve and Bank of Canada resumed rate cuts after lengthy pauses, with the Fed signalling the possibility of further reductions by year’s end. While the Fed is responding to concerns over a weakening labour market, the Bank of Canada’s additional easing is expected to be more constrained due to its already accommodative policy stance.

• Resilience of equity markets despite significant economic headwinds

North American equity markets showed strength in Q3, rebounding from declines after tariff announcements in early April. By September, indices like the S&P 500 and Dow Jones hit record highs, largely due to major gains from leading AI-focused tech firms, especially Nvidia. The US Treasury yield curve remained inverted, and bond markets signalled caution, but long-term yields steadied, and credit spreads narrowed as recession fears faded. The US dollar weakened against major currencies due to inflation concerns, rising public debt, and slower growth.

• AI spending frenzy as billions of dollars went to the buildout of data centres and other related infrastructure to support the growing adoption of AI

Recent headlines highlight a surge in AI-related capital expenditures, with tech companies investing heavily in building data centres and supporting infrastructure. Year-to-date, over $150 billion has been spent on AI development—surpassing the US government’s spending on education and social services for 2025—while global AI infrastructure spending is expected to reach $375 billion in 2025 and $500 billion in 2026. Notably, much of the economic growth attributed to AI is actually the result of this infrastructure buildout, rather than the direct adoption of AI by businesses.

Looking forward, there are three key themes that will shape the investment landscape for Q4 and 2026:

• Continued and often chaotic implementation of tariffs by the U.S. administration against a backdrop of protracted trade negotiations with key players

Recent U.S. tariff expansions—including new levies on Canadian softwood lumber, kitchen cabinets, and pharmaceuticals—are poised to increase the overall tariff rate to 20%, with significant implications for Canadian exporters, household purchasing power, and corporate profits. While initial inflationary impacts have been milder than feared, the burden of tariffs is increasingly shifting to consumers as companies pass on costs. Ongoing trade tensions with China persist, notably over market access and control of critical minerals, prolonging uncertainty and hampering concrete negotiations. Further compounding U.S. economic challenges are lower immigration levels, which reduce consumer spending and exacerbate labour shortages. Amid these pressures, business investment in AI infrastructure remains the primary driver sustaining U.S. economic growth.

• Growing dependence of equity market performance on AI spending, and increasing market concentration

Major tech companies are planning massive investments in AI infrastructure, with Microsoft alone set to spend over $100 billion and Meta targeting $66–72 billion in the coming year. Estimates suggest that up to $7 trillion will be needed over the next decade, but concerns are mounting about whether this surge in spending mirrors the dot-com bubble, especially as tech stocks now represent 55% of the market. The profitability of AI remains uncertain, as most current tools are not yet generating significant returns and most users rely on free services; experts estimate that annual AI revenues would need to reach $2 trillion by 2030 to justify current investments, compared to only $45 billion last year. While proponents believe AI could replace many white-collar jobs and potentially boost global GDP by 10%, the full impact on the workforce and broader economy remains unknown. Given the risks of market concentration and the uncertain path to profitability, importance of remaining diversified and holding uncorrelated assets becomes even more important during these volatile times.

• Increased activity in private markets as lower interest rates create more opportunities for transactions and exits

While lower interest rates have implications for both equity and bond markets, the rate cut is particularly impactful for private market assets. Reduced borrowing costs are expected to stimulate mergers and acquisitions, enhance cash flows and returns for private equity investors, and drive higher valuations and exit opportunities such as IPOs. In real estate, declining rates will likely compress cap rates and lift property values, attracting investors back into the market. At the same time, private credit will see improved conditions as companies face lower debt service costs, freeing up capital for investment and growth. Overall, the trend towards lower rates is anticipated to spur increased deal activity, higher valuations, and greater investment opportunities across private market assets.

If you would like to discuss your portfolio, please connect directly with your investment advisor. 
 

Disclaimer

I, Theresa Shutt, have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone and may not reflect the views of Harbourfront Wealth Management Inc. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this should be viewed as a reflection of my informed opinions rather than analyses produced by Harbourfront Wealth Management Inc.