Macro Musings: Standing at the Precipice – September 2025

Perhaps I’m an alarmist. Perhaps the media has become so partisan that I’m trapped in an algorithm with impenetrable walls and no windows to see more than one perspective. Perhaps the U.S. is being led into an economic promised land by the President. Or, perhaps we’re now farther out on the precipice than we’ve been in a very long time. Perhaps it’s not the tinnitus ringing in my ears, but alarm bells telling me that things are not okay…

The metaphor of “standing at the precipice” seems to resonate on a number of fronts. The independence of long-standing institutions like the U.S. Federal Reserve and the U.S. Bureau of Labor Statistics is deteriorating. The capitalist system that propelled the U.S. into being the most prosperous nation in history is being remoulded in a way that may have long-term negative consequences, like the U.S. government getting a “golden share” in U.S. Steel, taking 10% ownership of Intel¹, and demanding 15% of NVIDIA’s and Advanced Micro Devices (AMD) chip sales² to China. The rule of law is under strain. The march towards Artificial Intelligence (AI) superintelligence continues, and it feels like, almost literally, we went from “cool concept” to “just plug it into ChatGPT” overnight for everything from household questions to outright job replacement functions. Disruption, some or most of which might not be welcome, is certainly afoot.

For the casual observer, things might seem okay based on the current level of the U.S. stock market. But simply gauging the health of the world’s largest economy and the state of its union, based on this factor alone, overlooks some potentially critical elements. The emergence of potential threats to democracy is being papered over by the optimism associated with Big Tech and the U.S.’s role in innovating the world into tomorrow. But the entire stock market appears to be increasingly driven by this almost singular theme of AI and is likely at risk if some of the veneer comes off — an MIT study released in August³ that claimed 95% of organizations are not currently seeing any returns from their generative AI investments should be concerning to the evangelists of the new technologies. Don’t get me wrong, I certainly believe that AI is here to stay, but that doesn’t mean the massive amounts of capital chasing the buzzword are going to see the gains they’re expecting. Just as “hype” and early successes can propel start-ups towards multi-billion-dollar valuations, the U.S. stock market’s dependence on AI and the “herd mentality” leaves the market prone to wobbles, or worse.

Josh Brown, CEO of Ritholtz Wealth Management, podcaster and contributor on CNBC was quoted this past month saying, “Of course (AI) is a bubble…but there’s a capex bubble every generation. Not a big deal. There still could be years of upside ahead⁴.”

Here’s the thing with “bubble” talk, though. People start trying to take the current state of affairs and overlay it on a historical timeframe to better put things in perspective and to give guidance on the potential road ahead. Investors today are thinking back to the Dot Com bubble of the early 2000s and trying to draw similarities, but there’s a big fly in that ointment. Today’s Big Tech companies, which are benefitting from the AI boom, are not like the Dot Com “businesses” at the turn of the millennium. Unlike Dot Com companies like Pets.com for example, which had high valuations yet couldn’t even figure out a way to profitably ship goods to customers, today’s companies are absolute behemoths, often with numerous other business lines generating staggering profits.

My point here is not to make a claim one way or another on the likelihood of investors making money in AI-related companies. Instead, I’m just trying to foster dialogue and recognition of some potential risks or disruptions ahead. Take, for example, what now appears to be a complete re-rating of the Utilities sector. The surge in development of AI data centers is creating unprecedented electricity demand (also driving up electricity costs) that is spurring capital-intensive Utilities companies to increase capacity that will ultimately leave them far more exposed to tech-driven volatility. If investors are “getting out over their skis”, at least this one traditionally defensive sector may not cushion the blow of a downturn like it has in the past.

To give credit where credit is due, the “standing at the precipice” title of this month’s commentary was inspired by recent remarks by Mark Zandi, Chief Economist of Moody’s Analytics⁵. According to Mark, Moody’s recession model currently puts the probability of recession in the U.S. over the next 12 months at 49%… hence, right on the brink. What I found particularly noteworthy in his remarks was the fact that this model has 100% historical accuracy in predicting a recession dating all the way back to 1960, when the reading moves above 50%. In other words, there have been no false positives. What’s pushed the U.S. to the brink of a possible recession? You guessed it, according to Mark, broad-based tariffs, the overall economic policy of the White House and the clamp-down on immigration. This 49% probability may come as a surprise to some, particularly those who, as mentioned previously, simply look at the strength of the stock market. But when you peel back the onion, you start to reveal some of the vulnerabilities…

Let’s start with tariffs. According to the Yale Budget Lab⁶, consumers have faced an overall average effective tariff rate of about 10-11% over the summer months, up from just 2.4% at the beginning of the year. So what does that mean? Well, first of all, that pushes inflation higher as prices increase. Second, it has a material impact on real economic activity. Going back to Mark Zandi’s recent remarks, Moody’s analysis suggests that for every 1% increase in the effective tariff rate, gross domestic product (GDP) in the subsequent 12-month period declines by approximately 0.07% to 0.08%. Those seem like insignificant decreases in isolation, but when you do the math, the actual impact becomes material. Their view is that GDP would be 1.1% higher if these tariffs had never been put in place. As it stands today, GDP growth is somewhat blasé, consumer spending is moderating, construction activity is falling outside of data centers, manufacturing activity is stagnating, and job growth has stalled. But again, this not-so-tasty cocktail is relying on the sweetening of Big Tech, so if we see that segment of the market wobble, the 49% recession probability could notch higher and bring about a potentially painful correction for folks that are likely over-levered in a small handful of stocks.

Equity markets were strong in August with gains fairly broad-based. Perhaps the more interesting story that’s taking shape, however, is the rotation from “mega caps” to “small caps” in the U.S. While it has felt like the same old story in past monthly commentaries, where Big Tech names led the way and contributed most of the S&P 500 Index⁷ returns, small cap companies, as represented by the Russell 2000 Index⁸, were up over 7% in August alone. That surge brought the small-cap index up out of negative territory for the year, while mega-cap growth names lagged. There seems to be a growing belief that this mega-to-small cap rotation has some legs to it and could persist well into 2026. Small caps have been under pressure for a few reasons. The first of which is perhaps more structural in nature. More and more start-up companies are opting to stay private. Those that do go public seem to be doing so more in their later stages after securing the requisite funding from private markets. What that translates to is a lower valuation premium, as “hot” initial public offerings (IPO) tend to stay private, while those that do IPO in public markets have already experienced much of their early growth and public market investors are less inclined to “pay up” for shares. But, there is still breadth in the publicly listed U.S. small-cap market, with companies now set to benefit from declining interest rates and improved earnings growth. Furthermore, based on a U.S. Federal judge’s recent ruling that the newly imposed tariffs are illegal, there could be some reprieve for small caps, which are disproportionately hurt by both tariffs and higher interest rates relative to large-cap companies. That said, the tariff ruling is likely going to the U.S. Supreme Court next, so we’ll need to wait for that ultimate decision. As a result of these perceived headwinds, though, small caps, which had previously been beaten up in the market, can currently be bought at sizable valuation gaps relative to large caps.

Here at home, the S&P/TSX Composite Index⁹ was up 5% in August and widened its lead over the S&P 500 Index to almost 700 bps year to date. The Materials sector was the standout performer, up nearly 16%, as companies like SSR Mining Inc. (+60%), Equinox Gold Corp (+42%), New Gold Inc. (+40%) and others benefitted from strong commodity price increases, especially in copper, gold and silver. After posting such an outstanding month, the Materials sector in Canada is now up over 50% this year, miles ahead of every other sector in Canada and the U.S.

In the U.S., the market was up 2%, also driven by commodity-related sectors, while the Information Technology sector was virtually flat. Surprise, surprise, Intel was the best-performing Tech name, up 23%, as investors are now banking on the company receiving favourable treatment from the Trump administration. But what will the government’s 10% stake mean for the “free market” players like NVIDIA and AMD? On the surface, the U.S. government may seem incentivized to see Intel succeed, potentially at the expense of others, but it’s still too early to tell. Trump, however, has already put his “pay to play” approach on display, so this seems completely in the realm of probability.

Dividends were in favour in August, leading the way from a factor standpoint, while Growth paused its recent run. With regards to Gold, the commodity price climbed 5.5%, closing the month at US$3,473.70/ounce, largely on the back of interest rate cut expectations and concerns around the independence of the Fed. On the currency side, CAD rose 0.86% vs. USD, closing out the month at US$0.7278. On a related note, foreign central banks now hold more gold than they do U.S. treasuries, marking the first such occurrence since 1996, as they increasingly seek to hedge against further USD weakness.

Neither the Bank of Canada nor the Federal Reserve met in August, so here at home, policy interest rates remain at 2.75%¹⁰, while they remain pegged at 4.25-4.50%¹¹ in the U.S. Both central banks have their next meeting on September 17. At the time of writing, the market expects two more rate cuts in Canada before the end of the year, while three more are expected in the U.S., with a near 100% market-implied probability of a September cut taking place¹². In past commentaries, I’ve noted that the counterbalance to the potential for rate cuts in the U.S. is inflation, which is likely to pick up based on tariffs. While I still firmly believe inflation is set to increase from here (so too does Moody’s by the way, predicting inflation will climb from today’s 2.7% to 3.4% by mid-2026), I now believe the rising concerns about the health of the labour market have tipped the scales such that rate cuts are more likely. Take the comments from Fed Chairman Jerome Powell, in Jackson Hole, as the rationale: job growth has slowed significantly, and he’s concerned about higher unemployment, while GDP growth dropped to 1.2% in the first half of 2025, down from 2.5% in 2024¹³.

Think about that for a minute. Despite the massive AI boom we’ve seen, and the resultant build-out of AI data centers contributing to GDP growth, the number is still roughly half what it was in 2024. On top of that, you have the more cynical, but entirely possible, view that the President is aiming to take control of the Fed. Stacking the Fed, as was recently done with the Supreme Court, brings with it the possibility that it begins serving at the President’s pleasure, possibly cutting interest rates by more than is warranted and leaving them too low for too long. Historically, there has been precedent for central banks to be “captured” by executive branches of government and the playbook generally goes as follows: in the short term, interest rates come down and stay down for too long, inflation starts to heat up (sometimes gets out of control), the country’s currency further devalues and eventually interest rates need to rise back up significantly to combat runaway inflation. Let’s hope it doesn’t get to that, but rising long-term bond yields are reflecting at least some of this concern.

With regard to yield curve changes in both Canada and the U.S., we saw long-term bond yields increase by fairly material amounts. Despite signals that rate cuts are on the horizon, longer-term bond yields are more influenced by markets, rather than central banks. And as it stands, the market seems concerned with persistent inflation (both from tariffs as well as diminished Fed independence leading to overzealous rate cuts) as well as fiscal stress. Exacerbating the issue is that fewer foreign investors seem interested in U.S. treasuries, putting downward pressure on bond prices (upward pressure on yields).

All in all, equity markets are still trending up, but we’re paying close attention to what’s going on below the surface.

John Pagliacci
Vice President, Investment Programs and National Accounts | Guardian Capital LP
John Pagliacci is Vice President, Investment Programs and National Accounts for Guardian Capital LP. He contributes to strategic planning for the Canadian retail asset management business, including product strategy and development, overall sales enablement initiatives and serving as a brand ambassador.

David Onyett-Jeffries
Vice President, Economics & Multi Asset Solutions | Guardian Capital LP
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP). He provides macroeconomic guidance to GCLP and its affiliates. Additionally, he is a portfolio manager of GCLP’s multi-asset portfolios and funds and works closely with GCLP’s Directed Outcomes team.

¹ Intel, Newsroom, Intel and Trump Administration Reach Historic Agreement to Accelerate American Technology and Manufacturing Leadership, August 22, 2025, https://newsroom.intel.com/corporate/intel-and-trump-administration-reach-historic-agreement
² Investors Business Daily, News, Technology, Trump Confirms Nvidia, AMD To Give 15% Of China Chip Revenue To U.S. Government, August 11, 2025, https://www.investors.com/news/technology/nvidia-amd-give-15-china-chip-revenue-u-s-government/
³ MIT Nanda, The GenAI Divide | State of AI in Business 2025, July 2025, https://mlq.ai/media/quarterly_decks/v0.1_State_of_AI_in_Business_2025_Report.pdf
⁴ Vox Media, Prof G Markets podcast, AI Bubble Watch: Has the Hype Gone Too Far? — ft. Josh Brown, August 25, 2025, https://podcasts.apple.com/ca/podcast/ai-bubble-watch-has-the-hype-gone-too-far-ft-josh-brown/id1744631325?i=1000723412305
⁵ Vox Media, Prof G Markets podcast, Why the U.S. is on the Precipice of a Recession, August 29, 2025, https://podcasts.apple.com/ca/podcast/why-the-u-s-is-on-the-precipice-of-a-recession-ft-mark-zandi/id1744631325?i=1000724005195
⁶ The Budget Lab, Research, Short-Run Effects of 2025 Tariffs So Far, September 2, 2025, https://budgetlab.yale.edu/research/short-run-effects-2025-tariffs-so-far
⁷ The S&P 500 is an index of 500 stocks designed to reflect the risk/return characteristics of the large-cap US equity universe.
⁸ The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index.
⁹ The S&P/TSX Composite Index is the benchmark Canadian index, representing roughly 70% of the total market capitalization on the Toronto Stock Exchange (TSX) with about 250 companies included in it.
¹⁰ Bank of Canada, Core functions, Monetary policy, Policy Interest Rate, September 5, 2025, https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/
¹¹ Federalreserve.gov, The Federal Reserve Explained, FOMC’s target range for the federal funds rate, September 5, 2025, https://www.federalreserve.gov/aboutthefed/fedexplained/accessible-version.htm
¹² Source: Bloomberg, as of September 3, 2025
¹³ Center for Economic and Policy Research, Data Bytes, GDP Grows at a 3.0 Percent Rate in Q2, Bringing Average for First Half to 1.2 Percent, July 30, 2025, https://cepr.net/publications/gdp-quarter-2-2025-report/

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Published: September 10, 2025