Navigating Geopolitical and Tariff Uncertainty: Strategic Entry Points in Resilient Canadian Equities

In the second quarter of 2025, Canadian equities demonstrated remarkable resilience amid a volatile global landscape shaped by U.S.-Russia trade negotiations, Federal Reserve policy signals, and inflationary pressures. The S&P/TSX Composite Index surged 8.5% for the quarter, driven by strong performances in financials, technology, and consumer discretionary sectors. As investors grapple with geopolitical uncertainties and shifting monetary policy, identifying undervalued stocks in resilient industries offers a compelling opportunity to capitalize on market dislocations.

Macro Tailwinds: Fed Policy and Geopolitical Dynamics

The Federal Reserve's cautious hawkish stance, with the federal funds rate held at 4.25%–4.50%, has created a backdrop of inflationary vigilance. While two FOMC members dissented in favor of a rate cut in July 2025, Chair Jerome Powell emphasized that inflation risks remain unresolved. Meanwhile, U.S.-Russia trade talks and Trump's tariff regime have introduced volatility, prompting Canada to diversify trade partnerships with the EU and UK. These developments have reshaped investor sentiment, favoring sectors insulated from export shocks and inflationary pressures.

Canadian equities have benefited from a strengthening dollar and gold prices, while dividend-paying stocks—particularly in financials and energy—have outperformed. The Canadian Dividend Portfolio, comprising 31 companies, saw 18 firms increase dividends by an average of 2.38%, outpacing CPI growth. This resilience underscores the appeal of Canadian equities as a hedge against global uncertainty.

Sectoral Outperformance: Financials, Tech, and Consumer Discretionary

1. Financials: Canadian banks led the charge, with TD Bank and CIBC delivering 17.7% and 20.6% returns, respectively. Improved credit metrics and a focus on cost efficiency have bolstered sectoral confidence.
2. Technology: A turnaround in Q2 saw the sector rise 14.24%, driven by demand for digital infrastructure and e-commerce solutions. Celestica's 80% surge highlighted the sector's growth potential.
3. Consumer Discretionary: Companies like Canadian Tire Corp. (up 25.5%) and Shopify (added to portfolios) capitalized on recovering consumer spending, despite earlier Q1 jitters.

Undervalued Opportunities in Resilient Sectors

Amid market corrections, three stocks stand out for their strong fundamentals, alignment with macro trends, and attractive valuations:

1. A & W Food Services of Canada (TSX: AW)

• Sector: Consumer Discretionary
• Valuation: Trading at a 43.4% discount to estimated fair value (CA$58.33 vs. CA$33).
• Catalysts: Earnings growth of 58% annually over three years, driven by domestic demand and margin expansion.
• Alignment: Insulated from U.S. tariffs; benefits from stable consumer spending and potential rate cuts.

2. Hammond Power Solutions Inc. (TSX: HPS.A)

• Sector: Technology (Industrial Tech)
• Valuation: 42% undervalued (CA$161.58 fair value vs. CA$93.74).
• Catalysts: Earnings growth of 16.3% annually, supported by infrastructure spending and energy transition.
• Alignment: Low exposure to trade wars; essential for power infrastructure, a defensive play in uncertain times.

3. Badger Infrastructure Solutions Ltd. (TSX: BDGI)

• Sector: Consumer Discretionary (Infrastructure Services)
• Valuation: 46.6% discount to fair value (CA$75.79 vs. CA$40.44).
• Catalysts: 26% annual earnings growth, driven by U.S. and Canadian infrastructure spending.
• Alignment: Positioned to benefit from North American construction tailwinds, insulated from global trade frictions.

Strategic Entry Points and Risk Mitigation

The current market environment, marked by a 6.3% return for Canadian equities in May 2025, favors value and income strategies. Investors should prioritize stocks with strong balance sheets, low debt, and alignment with policy-driven growth areas (e.g., infrastructure, energy transition). The anticipated Bank of Canada rate cuts and moderation in inflation (1.7% in May 2025) further support a shift toward undervalued, high-quality equities.

Conclusion: Balancing Volatility and Opportunity

While geopolitical tensions and Fed policy create near-term headwinds, Canadian equities offer a compelling mix of resilience and growth. By focusing on sectors like financials, technology, and consumer discretionary—and leveraging undervalued stocks with strong catalysts—investors can navigate uncertainty while positioning for long-term outperformance. As the Fed monitors inflation and Canada diversifies trade, strategic entry points in these resilient equities may prove to be a cornerstone of a robust portfolio in 2025.