Purpose Investments' chief market strategist explains why strong earnings season is due to timing more than fundamentals and where the risks lie ahead for Q3 and Q4
Despite a turbulent macroeconomic backdrop and mounting fears around policy shifts and tariffs, Canadian pension funds and S&P 500 companies have managed to deliver strong results in the first two quarters of 2025.
Craig Basinger, chief market strategist at Purpose Investments, believes the strong performance has caught most market watchers off guard. What was expected to be a challenging period, due to a policy-driven equity correction, tariff threats, and broader macroeconomic uncertainty, turned out to be surprisingly resilient for both corporations and pension funds.
“I honestly think this has been the trend of 2025 that's probably surprised everyone,” he said. “We had a policy driven correction, almost bear market in equities, which are unique environments. We haven't seen those in a long time. Policy, for the most part, for the last 25 years, has been supportive of markets. Then we got this big bout of uncertainty, and everybody was worried this was going to lead to inflation and lead to companies laying people off or not going through with projects and be quite negative. It wasn't as negative as Liberation Day but for the most part, it hasn't changed anything. For the most part, even though it probably isn't good for margins on the tariff or uncertainty side, so far, it has been and I think that's been the big surprise. I firmly believe companies don't change their plans overnight, especially when there's just all this macro news.”
Part of the disconnect, Basinger explained, comes from a tendency among investors and commentators to both overreact to short-term headlines and underestimate how slowly long-term effects play out. He argues that while many anticipated widespread project delays and job cuts, the reality is that companies tend to take a slower, more deliberate approach to change.
Rather than pulling back, companies have continued spending and even raised prices, often in anticipation of potential cost pressures that haven't yet materialized. That has allowed margins to hold steady or even improve in some cases, especially since costs remain relatively flat, noted Basinger.
However, while the current environment represents a kind of “sweet spot” where companies have regained pricing power while inflation remains sticky but manageable, Bassinger suggests much of this strength may be front-loaded as he sees the current strength in corporate earnings as a result of timing more than fundamentals.
Companies have so far managed to sidestep the full impact of economic uncertainty and tariffs, largely because those effects have yet to hit balance sheets. He believes firms are in a temporary window of advantage because many have been raising prices without a matching rise in costs, boosting profit margins for now. That dynamic, paired with economic activity that may have been pulled forward earlier in the year, helped drive strong Q1 and Q2 results.
He cautions that this window is likely closing. With less consumer appetite than in the post-COVID boom, and a weaker backdrop of pent-up demand, companies may find it harder to maintain pricing power going forward.
Yet, these tailwinds may not last much longer as Basinger noted that in the US, a weaker dollar has inflated overseas earnings. Additionally, the AI boom continues to fuel profits across a range of sectors, with companies investing heavily in technologies that are boosting both current and future earnings potential.
Whereas in Canada, much of the TSX’s growth has been driven in a far more traditional sector: gold. With prices climbing, domestic miners are generating strong earnings.
“These gold companies are printing a lot of money right now,” Basinger said. “A big chunk of [Canada’s] future earnings growth is coming from gold.”
But he’s cautious about how sustainable or valuable that growth is in the eyes of investors. Unlike tech, which tends to attract high valuations, commodity-driven gains are more volatile.
Basinger expects more aggressive downward revisions given the level of macroeconomic uncertainty. The real impact of that uncertainty has simply been delayed, he said, pointing to hiring as an example. Companies may not be laying off workers, but they’re certainly pulling back on recruitment.
Rather than reacting immediately to uncertainty, firms appear to be waiting to see how policy and market conditions evolve. He believes that lag is key.
“Very often we think things should be immediate and show up in earnings immediately. And I think these things actually take longer to filter through,” he said.
If growth was pulled forward in the first half of the year, through capex, manufacturing, or inventory builds to get ahead of possible tariffs, the risk now is that activity will taper off. That sets up a more difficult path for earnings in Q3, Q4, and potentially into 2026.
That’s why Basinger’s team has scaled back exposure to US equities, increasing allocation to international markets, which he noted has delivered solid returns so far this year.
They’re also underweight on bonds, anticipating that inflation could tick up again in the months ahead, a potential drag on fixed income. With both equities and bonds underweighted, Purpose is holding more in cash and alternative investments.
“We just think that’s a better positioning given sort of where the market is and some of the potential headwinds ahead,” he explained.
Basinger ultimately sees this cash-heavy stance as an opportunity for investors. Should economic momentum slow and markets pull back, they’ll be ready to take advantage.
“We have lots of cash to do some buying,” he said.
