The second quarter was another reminder that the stock market and the real economy seem to be living in completely different neighbourhoods.
Markets: Still Defying Gravity
If you only looked at stock prices, you’d think everything was sunshine, rainbows, and unlimited coffee.
- Canadian, U.S., European, and emerging market stocks all posted strong gains.
- Long-term returns remain well above their historical averages.
- Bonds continue to disappoint investors.
- Oil has gone nowhere for three years.
- Gold finally took a breather after a spectacular run.
In short:
Stocks are partying. Bonds are wondering if anyone remembers they exist.
Canada: Main Street Isn’t Celebrating
Despite strong stock markets, Canadians aren’t exactly feeling wealthy.
People remain worried about jobs, finances, and the cost of living. Small business confidence is also near historic lows, even while the TSX continues to climb.
Why Are Stocks Going Up?
A major reason may simply be money flows.
Passive investing now attracts far more money than active management. Every new dollar automatically buys more of the largest companies, helping them grow even larger.
Think of it like giving the tallest kid in class another pair of platform shoes.
Government Debt
Governments continue carrying large debt loads. Most spending goes toward transfers, healthcare, education, and debt servicing. Slow economic growth makes that debt harder to manage over time.
Canadian Consumers
Higher-income households pay most of Canada’s income taxes. When taxes rise—or people expect them to—consumer spending often slows.
The U.S. Story
Leadership has shifted beyond the Magnificent Seven. Semiconductor companies like Micron and Intel have become major market leaders, which is a healthier sign for the broader market.
AI Remains the Big Theme
Microsoft, Amazon, Google, Meta, and Oracle continue investing hundreds of billions into AI infrastructure, benefiting utilities, power companies, semiconductor manufacturers, and industrial suppliers.
When AI decides to build a house, just about everyone sells it something.
The Catch
Eventually, those investments need to generate meaningful returns.
AI Usage Is Exploding
Google reports AI token processing has grown from roughly 10 trillion per month in 2024 to 3.2 quadrillion today, while processing costs continue falling dramatically.
Bottom Line
We are not calling for a market crash, but we remain mindful of slowing economic growth, weak consumer confidence, rising government debt, and elevated AI valuations.
AI remains the biggest growth story in markets.
Final Thought
The economy may be driving a family sedan while the stock market is flying a fighter jet. Eventually, they’ll meet somewhere in the middle—but figuring out when is what keeps economists employed… and humble.
