At first glance, the US economy continues to look resilient. Headline GDP growth remains intact, equity markets are buoyant, and the unemployment rate is hovering near cycle lows. Yet beneath this surface strength, the picture is more nuanced. Specifically, is a concentrated boom in artificial intelligence (AI)–related capital investment masking underlying weakness?

Massive investments in data centers, advanced semiconductors, and cloud infrastructure have meaningfully contributed to GDP growth. However, outside of Big Tech, many companies remain cautious in deploying capital, citing uncertain returns from early AI adoption and ongoing cost pressures. The risk is that this tech-driven boom becomes too narrow and collapses under its own weight.

US manufacturers are showing clear signs of strain. Tariffs on imported goods have pushed up input costs and squeezed margins across a range of industries, from automotive to consumer electronics. Some of these costs are being passed onto consumers, contributing to inflation in specific categories. Small businesses are disproportionately exposed, lacking the scale or pricing power to absorb tariff shocks.

Cracks in the labour market are also starting to appear. While unemployment remains low, jobless claims have started rising modestly. Job openings, hire and quit rates are falling simultaneously, signaling decreased demand for labour and ebbing worker confidence. 

Despite these red flags (which have a tendency of being overly scrutinized by the media), there are numerous key supports which should not be overlooked. In terms of economic impact, services overshadow manufacturing by a wide margin. Per the chart below, services now account for roughly 70% of the US economy, while manufacturing has slid to 10%. Services in aggregate continue to show relative strength, with solid earnings growth and resilient demand.

While trade policy has undoubtedly created uncertainty for businesses and consumers, other government initiatives should have the opposite effect. The passage of the “One Big Beautiful Bill” will provide a boost to domestic demand after a short-lived effort by DOGE to rein in the fiscal deficit. Deregulation initiatives should provide a tailwind in several industries. Banks are a standout in this regard, as the potential for lighter capital requirements would increase the availability of credit and boost profitability.

Monetary policy is somewhat mixed. Federal Reserve officials have recently signaled a shift in tone, with the prospect of rate cuts gaining credibility amid the cooling labour market. Lower rates could help unstick housing markets and ease financial conditions for businesses strained by higher borrowing costs. However, the likelihood of a deep rate cutting cycle is low, considering annual inflation measures are already above the Fed’s target level and could be further exacerbated by tariffs. 

Putting it all together, the US’ massive AI spend continues to distort aggregate growth figures, but warning signs for the underlying economy, while concerning, should not be exaggerated. Predicting more steady policymaking from the current US administration may be wishful thinking, but the destabilizing impact of on-and-off tariffs should recede as deals with major trading partners are reached. That would go a long way towards restoring hiring and spending intentions amongst US businesses. While we continue to see better growth opportunities in other markets (see our recent Ask Forstrong: Postcard From Europe piece), continued resilience in the US would be supportive of global growth and investor sentiment alike.

The US dollar appears to be at a critical inflection point; rolling over against most major currencies from a starting point of over-valuation. At the same time, the recent change in Canadian leadership marks a shift to a more business-friendly, pro-growth political landscape. We have increased the Canadian dollar hedge on US asset class exposures in client portfolios.

Longer-term government bond yields in most major markets continue to grind higher as investors demand a larger term premium to compensate for inflation and fiscal largesse concerns. While the higher yields improve the risk/return trade-off, we believe the adjustment at the long-end of the curve has further to run. Fixed income exposure has been kept below benchmark this quarter.

Smaller US companies typically have weaker balance sheets, less operational flexibility and limited lobbying influence, making them more exposed to supply chain disruption risks and elevated financing costs. Forward earnings confirm these vulnerabilities, as weakening revisions flash warning signals for the small and mid-cap cohorts. We have trimmed exposure to US mid-cap equities in client portfolios.

With the US Federal Reserve unlikely to deliver aggressive easing absent a material economic slowdown, a further bull steepening of the yield curve appears constrained. As a highly leveraged and rate-sensitive asset class, mortgage REITs are particularly vulnerable to fiscal uncertainties and tariff-related shocks, with higher hedging costs eroding potential returns. A high-yielding position in US mortgage REITs has been trimmed in income-oriented strategies and liquidated in balanced strategies this quarter.

The information contained in these materials is for general informational purposes only and is intended to provide only brief comments on broad market, industry or sector trends, or other general economic or market conditions. It is not intended to provide an overview of the terms applicable to any products or funds managed or sponsored by Forstrong Global Asset Management Inc. (“Forstrong”). Views expressed regarding a particular company, security, industry, investment, or market sector are the views only of that individual as of the time expressed and do not necessarily represent the views of Forstrong or any other person in the Forstrong organization.  These materials contain information and views as of the date indicated and such information and views are subject to change at any time without notice, based upon market and other conditions, and Forstrong disclaims any and all responsibility to update such information and views.  These views are not and may not be relied upon as investment advice and, because investment decisions for a Forstrong fund or product are based on numerous factors, are not and should not be relied upon as an indication of trading intent on behalf of any Forstrong fund or product.  Any opinion or assumption may contain elements of subjective judgment and are not intended to imply, nor should be interpreted as conveying, any form of guarantee or assurance by Forstrong of any future action or performance. Neither Forstrong nor any of its affiliates, businesses, or representatives make any representation or warranty, express or implied, as to the accuracy, reliability, completeness, appropriateness, or sufficiency for any purpose of any information contained herein. Forstrong and its affiliates and related entities disclaim any and all liability relating to the information herein, including, without limitation, any express or implied representations or warranties for, statements contained in, and omissions from, the information.  Forstrong and its affiliates and related entities are not liable for any errors or omissions in any information herein or for any loss or damage suffered, whether direct or consequential, resulting from the use of these materials.

The information contained in these materials is strictly for general illustrative, educational, or informational purposes, and is not intended to provide legal, investment, accounting, or tax advice, and should not be relied upon in that regard. These materials contain information and views as of the date indicated and such information and views are subject to change at any time without notice, based upon market and other conditions, and Forstrong disclaims any and all responsibility to update such information and views.  These views are not and may not be relied upon as investment advice.  Any opinion or assumption may contain elements of subjective judgment and are not intended to imply, nor should be interpreted as conveying, any form of guarantee or assurance by Forstrong of any future action or performance. Neither Forstrong nor any of its affiliates, businesses, or representatives make any representation or warranty, express or implied, as to the accuracy, reliability, completeness, appropriateness, or sufficiency for any purpose of any information contained herein. Forstrong and its affiliates and related entities disclaim any and all liability relating to the information herein, including, without limitation, any express or implied representations or warranties for, statements contained in, and omissions from, the information.  Forstrong and its affiliates and related entities are not liable for any errors or omissions in any information herein or for any loss or damage suffered, whether direct or consequential, resulting from the use of these materials. 

Any specific companies, issuers, funds, ETFs, or indices mentioned are for illustrative or educational purposes only and are not and shall not be deemed to be a recommendation to buy or sell any securities.  Any companies, issuers, funds, or ETFs mentioned do not necessarily represent current or future holdings of any Forstrong funds or products. Any strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

Commissions, fees, and expenses all may be associated with investments in Forstrong funds, ETFs, and/or other investment products.  Please read a fund’s offering memorandum or ETF’s prospectus, as applicable, which contains detailed information, and speak to an advisor before investing.  Funds and ETFs are not guaranteed, their values change frequently, and investors may experience a gain or loss.  Past performance may not be repeated.  

Certain statements in these materials may contain forward-looking statements or forward-looking information that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “plans”, believes”, “estimates”, and similar forward-looking expressions or negative versions thereof.  Such forward-looking statements are based on current expectations and projections about future general economic, political, and other relevant market factors, such as interest, and assuming no changes to applicable tax or other laws or regulations.  Expectations and projections about future events are inherently subject to, among other things, risks and uncertainties, some of which may be unforeseeable and, accordingly, may prove to be incorrect at a future date.  Forward-looking statements are not guarantees of future performance, and actual events could differ materially from those expressed or implied in any forward-looking statements.  A number of important factors can contribute to these differences, including, but not limited to, general economic, political, and market factors in Canada and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, and catastrophic events.  You should avoid placing any undue reliance on forward-looking statements.  Past performance is no indicator of future performance and the materials are not intended to forecast or predict future events. Forstrong disclaims any and all responsibility to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as specifically required by law. 

The index returns are shown for illustrative or informational purposes only.  Indexes are unmanaged, and index performance does not include the impact of fees, commissions, and transaction costs and expenses that would be payable by investors in investment products that seek to track an index.  Such costs would lower performance. It is not possible to invest directly in an index.  Past performance does not guarantee future results. Index performance does not represent actual fund performance.

The allocation information shown above is for general informational purposes only and is intended to provide only a summary overview of Forstrong’s historical allocation methodologies over the indicated periods shown above.  The above information is not meant to illustrate specific allocations or exposures within any particular Forstrong fund or product, including Forstrong exchange-traded funds (ETFs).  The above information is historical in nature only and is not indicative of future results or actions.  These materials contain information and views as of the date indicated and such information and views are subject to change at any time without notice, based upon market and other conditions, and Forstrong disclaims any and all responsibility to update such information and views.  Graphs and charts are used for illustrative purposes only.  The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

Commissions, fees, and expenses all may be associated with investments in Forstrong funds, ETFs, and/or other investment products.  Please read a fund’s offering memorandum or ETF’s prospectus, as applicable, which contains detailed information, and speak to an advisor before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Funds and ETFs are not guaranteed, their values change frequently, and investors may experience a gain or loss.  Past performance may not be repeated. 

The information contained herein is presented solely for illustrative purposes and should not be construed as a forecast or projection. While some information used herein has been obtained from various published and unpublished third-party sources considered to be reliable, such information has not been independently verified by Forstrong (and Forstrong disclaims any obligation to verify) and Forstrong does not guarantee its accuracy or completeness and accepts no liability for any loss or damage suffered, whether direct or consequential, resulting from its use. It should be noted that data provided may be approximate numbers. 

©2025 Forstrong Global Asset Management Inc.  All rights reserved. 

Forstrong Global® and the Forstrong Global® logo are trademarks or registered trademarks of Forstrong Global Asset Management Inc. in Canada.