Market Quote: Canada’s Inflation Rate, U.S. Bank Earnings, AI’s Next Wave
Author: The editor's desk
January 23, 2025
A mid-week analysis of what’s happening in global financial markets from the perspective of AGF’s investment management team.
A Taxing Situation
While this week’s low Canadian inflation print was welcome news on the surface, a key factor was the government’s GST tax holiday. Removing that impact, headline inflation reaccelerated to 2.3%, however, core CPI continued to decelerate on a year-over-year basis, remaining in the low 2’s.
On balance, this should be enough for the Bank of Canada (BoC) to cut rates by another 25 basis points next week. Longer term, looming challenges including tougher year-over-year inflation comparisons, the potential impact of tariffs, and a likely federal election this spring may give the BoC reason to pause and assess the effects of its aggressive rate-cutting cycle over the past seven months before making further moves.
Momentum Begets Momentum?
U.S. banks’ fourth quarter earnings season has further reinforced the positive share price momentum that has been mostly shared by the group since the U.S. election in November. We maintain a bullish stance on the sector based on strong fundamentals and the potential of further catalysts on the horizon.
Namely, this includes the possibility of a lighter regulatory touch under the Trump administration, which could give investors more confidence that bank returns on equity (ROEs) will lift, and that the industry will further consolidate via mergers and acquisitions. Moreover, it’s hoped that a more accommodative regulatory environment could lead to more favourable backdrop for share buybacks.
While U.S. banks are roughly trading at a 10% price/earnings premium to Canadian banks — versus an in-line valuation between the two groups, historically – this premium is supported by Q4 results that have generally demonstrated excellent capital markets earnings and net interest margin improvements on the back of an easier competitive environment for deposits and better loan growth outlook.
Having said that, commercial and industrial loan growth has not materialized and any disappointments could negatively impact the valuation multiples going forward.
If You Build It…
It’s no secret that Artificial Intelligence (AI) is a key driver of stock market returns in the current environment, but as the technology becomes more ingrained in our daily lives, investment opportunities related to it are bound to expand.
In particular, the massive buildout of AI infrastructure that we’ve seen over the course of the past few years (last 2 plus years) may broaden out to include a growing emphasis on networking in addition to core compute. And within core compute, higher growth may come from the manufacture of application-specific integrated circuits (ASICs) as opposed to general purpose processors.
Moreover, we believe the market for AI applications has the potential to grow significantly in the next few years – especially in the realm of digital advertising. To that end, we expect market leaders in Generative AI to benefit from a growing focus on “agentic” applications in areas such as data analytics and advertising automation, just to name a few.
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The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
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Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. Our companies deliver excellence in investing in the public and private markets through three business lines: AGF Investments, AGF Capital Partners and AGF Private Wealth.
AGF brings a disciplined approach, focused on incorporating sound, responsible and sustainable corporate practices. The firm’s collective investment expertise, driven by its fundamental, quantitative and private investing capabilities, extends globally to a wide range of clients, from financial advisors and their clients to high-net worth and institutional investors including pension plans, corporate plans, sovereign wealth funds, endowments and foundations.
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