The start of the year has shown promise, with both equities and bonds ending the month with positive returns. The major equity indices saw Europe leading the way, gaining 7.1%, outpacing Canada at 3.5%, and the US, ending up 2.8%. Value stocks in the US also outperformed their growth counterparts, with their Bloomberg style indices returning 4.5% and 2.6%. The return of President Trump to the White House and his ‘America First’ policy agenda provided support for US equities. However, the rise of Chinese AI company DeepSeek raised questions about the US technology sector’s ability to meet its high growth expectations. As the AI theme continues to dominate the narrative, its evolution competes with political developments to determine equity market leadership. While we have seen some recent broadening in the US market, the S&P 500 also continues to increase in concentration, as the market capitalization of a handful of winning companies continues to show an increase over the rest of the market.
Bond markets experienced volatility in January, driven by President Trump’s proposed policies, which included tax cuts, reigning in immigration, and tariffs on Mexico, Canada, and China, with talk of more regions to come. These policies fueled expectations for higher US inflation, leading to an increase in bond yields. Despite the volatility, the Bloomberg Global Aggregate Bond Index still ended the month with a positive, yet muted, 0.6% gain. This was supported by tighter credit spreads and the release of a softer than expected US December inflation report.
Commodities were among the top performing asset classes for the month, with the Bloomberg Commodity Index rising by 4.0%. Metal prices, including gold, increased due to Trump’s tariff threats, while oil prices were boosted by cold winter weather and US sanctions on Russia, they remained muted and reversed mid-month, from a reiteration in Trump’s plan to reduce oil prices and increase U.S production.
Equities
Canada’s S&P/TSX composite index experienced a modest rally over the course of January, ending the month at 3.5%. This was sharply reversed at the start of February, when US tariff threats came to a head. They were issued February 1st to start February 4th, and until the last minute, it looked like they would go ahead as planned. From market close on January 30th to the morning of February 3rd, the index declined 3%, reversing nearly all of January’s gain. Ultimately, the implementation was delayed by 30 days, but the uncertainty remains intact.
In the US, the S&P 500 Index gained 2.8%. The US economy continued its resilience by adding 256,000 jobs in December and achieving an annualized GDP growth of 2.3% in the fourth quarter. President Trump’s promises of deregulation and tax cuts further fueled optimism. However, The US market’s high concentration in the technology sector weighed on performance towards the end of the month, with the negative impact of the news of Chinese company DeepSeek developing efficient, low-cost AI models. This created doubt about the forecasted demand for semi conductor chips. The most impacted company was Nvidia, with around $600 billion of its market value being wiped out on January 27th, the largest one-day drop in US stock market history.
Overseas, the MSCI Europe ex-UK Index emerged as the top-performing major equity market in January, rising by 7.1%. This performance was primarily attributed to the financials and consumer discretionary sectors, supported by a solid global economic backdrop and improved macro-economic data. Particularly, two leading economic indicators, the Purchasing Managers’ Index (PMI), which moved above 50, into expansionary territory, at 50.2, and retail sales, which grew by 1.2% year-on-year in November. This marked a fifth consecutive month of growth for retail sales. The outperformance can also be attributed to a comparatively low exposure to the technology sector, and upward revisions of 2025 earnings expectations from Analysts, following positive surprises in the fourth quarter earnings season.
UK stocks also performed well, with the FTSE All-Share increasing by 5.5%. The sharp depreciation of sterling provided a tailwind, as three-quarters of the index’s revenues are derived from abroad.
Chinese equities saw marginal gains, driven by positive domestic economic data and less aggressive tariff threats from Trump. Conversely, Indian equities fell by 3.5%, marking the fourth consecutive negative month, due to stock valuation multiple compression, weak earnings and an uncertain economic outlook. This decline affected the overall performance of the MSCI EM Index, which rose by 1.8%, and the MSCI Asia ex-Japan Index, which increased by 0.8%.
Japanese equities lagged in January, with the TOPIX delivering a modest 0.1% gain. The Bank of Japan hiked interest rates by 25 basis point interest rate because of increased confidence in domestic wage growth. This created upward pressure on the yen, in turn applying pressure to Japanese stocks because of the drag the higher valued currency had on exports.
Fixed income
The Canadian fixed-income market had a strong start to the year, posting monthly gains of 1.1%. This positive performance was driven by uncertainty surrounding potential tariffs from the Trump administration on Canadian exports and the Bank of Canada’s accommodative stance, which led to a decline in bond yields. The Bank of Canada cut its policy rate by 25 basis points during the month, while the Federal Reserve held steady, further accentuating the interest rate differential between the two countries.
In the US, 10-year Treasury yields climbed by around 20 basis points over the first half of the month, as investors anticipated an increase in government spending and persistent inflation with Trump’s return to office. However, US government bonds rallied later in the month due to a weaker than expected December inflation report and then again following a sell-off in AI tech stocks. This balanced out to a 0.5% gain.
European government bonds also experienced volatility. Italian bonds remained flat, while Spanish bonds declined by 0.1% in January. German Bunds saw a more significant drop of 0.4%, likely reflecting increased expectations for a change in policies currently in place that limit government spending and greater fiscal stimulus ahead of the upcoming federal election in February.
In the UK, international factors and growing concerns about stagflation briefly pushed 10-year Gilt yields to their highest level since 2008. However, a weaker than expected December inflation report calmed sentiment, and UK bonds ended the month up 0.8%.
Credit markets saw spreads tighten across both high yield and investment grade bonds. The US high yield market outperformed with a 1.4% gain, compared to a 0.6% increase in Europe. Global investment grade bonds returned 0.6%. A weaker US dollar provided a tailwind for emerging market debt, which rose by 1.2% over the month.
Conclusion
January equity market themes highlighted the present risks of deglobalization and the high concentration of the S&P 500, as well the high earnings expectations placed on its top performers. Reminders of the importance of regional diversification in an investment portfolio. Beyond equities, already tight global credit spreads tightened further, which helped lift corporate bond returns. While the global economic outlook remains positive, there remains a risk that current elevated political tensions end up eroding business confidence and weakening global growth. Inflation and fiscal spending levels also remain concerns going into February.
