A clearer view of risks and reduced uncertainty have supported investor confidence in recent months, even if the economic outlook in the U.S. and Canada is not entirely rosy.  

Earlier in 2025, market participants had many questions about what U.S. tariffs would ultimately look like, what that could mean for inflation and how central banks would respond. Today, many of those questions have been answered, giving economists and investors the information they need to factor those risks into their forecasts and portfolios.  

To make sense of what’s happened so far this year and how that context will shape 2026, BMO hosted a panel discussion titled “What’s Next in Economics, Markets, and Trade?” Camilla Sutton, Managing Director and Head of Equity Research, Canada & UK, BMO Capital Markets, moderated the panel, which included: 

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  Doug Porter, Managing Director & Chief Economist, BMO 

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  Ernie Tedeschi, Director of Economics at Yale University’s Budget Lab and former Chief Economist at the White House Council of Economic Advisers 

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  Dan Phillips, Chief Investment Officer, BMO U.S. Wealth Management. 

For most of the year, business leaders and investors have had no shortage of curveballs to handle, including trade tensions, shifting U.S. fiscal and tax policies and, more recently, the potential U.S. government shutdown. On the one hand, it may seem as though economic and business confidence is quite weak, but the reality is more nuanced, Doug Porter explained.  

For the past nine months, everyone has been trying to figure out how these complicated variables were going to weigh on inflation and growth, he explained. Now the concern has shifted somewhat from inflation to the weakening employment picture. “It’s clear that payroll growth is slowing quite markedly,” he says.  

The U.S. unemployment rate is at 4.3%, up nearly a full percentage point from its low in April 2023, noted Ernie Tedeschi. That number is not alarming, but it is right on the cusp of what economists would define as full employment. “If you have a job in the United States right now, you’re fine, but if you’re looking for a job or a new entrant, it’s a very difficult labor market,” he says.  

In terms of the overall health of the U.S. economy, neither Porter nor Tedeschi felt there was any reason to expect a recession. In the final read on the second quarter, U.S. GDP growth rose to 3.8% while third quarter growth is expected to come in somewhere between 2.5% and 3%, said Porter. “The recent GDP numbers are still quite solid,” he said. “Overall, we’re not looking at a particularly robust year for the U.S. economy, but not weak either.” 

Tedeschi shares a similar view. “What we have in the U.S. is a split personality economy right now,” he said, pointing to the dichotomy between GDP growth and slowing employment. Tedeschi did note that the U.S. economy is partially being supported by private investment in Artificial Intelligence technologies. The challenge is understanding how durable that investment will be.  

For 2025, BMO Economics expects U.S. GDP growth will come in slightly above 2%, with similar growth expected in 2026 as well. In Canada, BMO Economics is projecting GDP will rise by a little more than 1% this year, so not quite a recession, said Porter.  

Market concerns about U.S. tariffs that triggered stock market volatility in April has largely subsided.  

Tariffs are impacting consumer spending on durable goods, which turned negative early in the year, but otherwise the U.S. consumer has been resilient. Still, Tedeschi said there is clear evidence that tariffs are causing prices to rise, with costs for core goods about 2% higher than where he would have predicted based on 2024 trends. “It’s not huge in the grand scheme of all prices,” he says, “but that is a noticeable effect, especially for consumers.” 

When it comes to the relationship between Canada and the U.S., Tedeschi noted how effective the USMCA regional trade agreement has been at blunting the impact of U.S. tariffs on Canada. When you look at the effective tariff rate of all the duty-related revenue the U.S. is collecting from Canadian imports, it’s only 3%, he said. “We were expecting roughly about 50% of trade with Canada to be tariff free under USMCA, and it’s been almost all trade [that has been covered under USMCA and therefore tariff free],” he said.  

BMO Economics is projecting the Federal Reserve may cut benchmark rates by another 75 basis points next year, following a similar degree of cuts in 2025, taking them down to 3%.  

North of the border, the Bank of Canada (BoC) has shifted its focus away from inflation risks and more towards somewhat weaker growth, said Porter. Ultimately, he sees the BoC bringing the overnight rate down to 2%, meaning two more cuts. “The timing of that’s a little bit unclear at this point, but for now, we’re looking for a skip at the next meeting in October, then a cut in December, with the final cut in March of next year,” he said. “A lot depends exactly on how the inflation and unemployment numbers turn out in the months ahead.” 

Few predicted how well equity markets would perform this year, with the S&P/TSX Composite leading the way.  

Investors have not only gained more clarity around the impacts of tariffs on the wider economy, they also have more confidence to invest. “Markets hate uncertainty,” said Phillips. Knowing the effective tariff rate, the impact on the job market and how the Fed could react – even if some signals are negative – has helped investors make better decisions based on their perceptions of risks, he explains.   

Although Phillips acknowledges valuations look high, a one-year timeframe has never been a reliable predictor of market performance. Instead, he sees a more positive outlook.  

Citing the potential for more Fed rate cuts, upcoming U.S. midterm elections, deregulation, and continued investment in AI, Phillips said, “There are a number of catalysts that we could see over the next six to 12 months that could continue to push markets higher.”