It’s time for caution. That was the verdict among panelists at the March 5 Morningstar forum “Navigating 2025: Insights for Canadian Investors,” moderated by Morningstar Canada director of investment research Ian Tam. The panel featured Stephen Lingard, senior VP and co-head of multi-asset at CI Global Asset Management, David Tulk, global asset allocation portfolio manager at Fidelity Investments, and Dave Sekera, chief US market strategist at Morningstar.
Rethinking Asset Allocation
Political uncertainty and high valuations in the US equities markets are leading portfolio managers to hunt further afield for attractive value opportunities. Lingard said he recently lowered his exposure to US equities and the US dollar. “We’ve taken money off the table in the US, seeking diversification in a higher-volatility environment,” he explained, identifying daily market gyrations and policy uncertainty as drivers.
Moving away from a more conventional 60% equity/40% fixed income asset mix, Lingard’s allocation now sits at 57% equities, 37% bonds, and 4% commodities, including gold and cash—“a vanilla split.”
Tulk spoke of a similar pivot to global opportunities. Calling his current strategy “long confusion and short conviction,” he said he lowered his exposure to Canadian assets (equities, bonds, and the dollar) while pivoting from a US overweight toward European markets. “We’re watching a rotation story catalyzed by a weakening US dollar and defense spending in Germany,” he said. To hedge inflation risks, he favors gold bullion ETFs and inflation-protected bonds over higher-risk investments as uncertainty mounts.
Equity Valuations: a Tale of Two Markets
Sekera said US equity markets tend to move like a pendulum: “They swing until they overshoot and correct.” He added that the broader US market, particularly black-chip tech stocks, was fairly valued. “Growth stocks, despite retrenching, are still overvalued by about 8%,” he said, noting that value stocks were still undervalued despite being up 4%-5% in the year to date. His tactical playbook? Overweight value, underweight growth, and a sharp focus on small caps, which he sees trading at a 14%-15% discount. “They haven’t worked yet, but once they do, they’ll move quickly,” he said, urging investors to position early.
Sekera explained that much of the stock market runup in 2024 was driven by the artificial intelligence theme, dominated chiefly by Nvidia NVDA, along with a handful of stocks that fueled over 50% of market gains. He added that these stocks are quickly losing runway. “AI hardware providers were overvalued by mid-year, [therefore] I don’t see much room left,” he said. He’s looking for opportunities in overlooked sectors, including communications, energy, and defensive real estate, while flagging overvalued darlings like Walmart and Costco. “The market over-extrapolates short-term growth,” he cautioned.
Lingard sees attractive opportunities in China, shrugging off tariff risks for now: “Valuations are low and fundamentals are inflecting positively.”
The Focus Shifts to Earnings
Tulk said this year’s equity story hinges on corporate profits, not just market valuations: “Last year was about multiple expansion, [but] this year, earnings must drive performance.” Looking at earnings forecasts as an early sign of market direction, he finds the United States a bright spot. “[Earnings] revisions have been consistently positive in the US, suggesting tailwinds despite high valuations,” he said, though he flagged tariffs as a wild card. Elsewhere, Europe and emerging markets, long undervalued, need a catalyst, which could come in the form of “coordinated European government spending.”
Sekera pointed to some short-term confusion muddying the picture, blaming it on companies stockpiling goods to dodge tariffs. “That distorts first-quarter earnings, but it’ll normalize later,” he said, advising investors to look past short-term hiccups and focus on the big picture and stocks growing over time.
Lingard supported this, saying the world economy still has room to grow: “Monetary policy is accommodative, and fiscal priming [government spending] supports above-trend growth in many markets.”
The US Divergence: the Top 10 vs. the Rest
A striking theme of the discussion was the US market’s split personality. Tulk observed that the top 10 S&P 500 stocks trade at a premium to the other 490. “If the US economy stays positive with fiscal stimulus and deregulation, growth could spread to the broader 490,” he said, though he conceded that tariffs could derail that outlook.
Lingard underscored the vulnerability in the top-tier stocks. “It’s gone from the ‘Magnificent Seven’ to maybe two or three [players],” he said, pointing to AI challengers like DeepSeek and upcoming Middle Eastern large language models eroding growth premiums. “The other 493—roughly two-thirds of the index—offer value,” he said, noting widening fair value discounts among small caps.
The Road Ahead: Value in Uncertainty
The takeaway was clear. Volatility is the new normal, but not without opportunity. Lingard’s focus on diversification, Tulk’s emphasis on earnings, and Sekera’s search for value share the same key theme: adaptability. Whether one looks at China’s rebound, Europe’s fiscal awakening, or growth potential for US small caps, 2025 demands a nimble approach. “Stock picking will regain importance,” Lingard forecast, adding that volatility is one side of a coin. Opportunity is the other.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
