September Market Commentary | Leadership Narrows as Policy Unfolds

Below is a condensed version of Chief Economist Rob Edel’s Market Commentary, offering key highlights from September's market activity. To read the full commentary, click here.

Rally on the surface, caution beneath

North American markets delivered positive returns in September, with Canadian equities outperforming global peers for the first time since 2022. The rally in gold and gold-mining stocks contributed to the S&P/TSX’s gains, even as it signalled a degree of investor unease. Despite record equity levels, fund flows showed ongoing risk aversion, and the American Association of Individual Investors reported several weeks of bearish sentiment through mid-month. Meanwhile, money-market fund assets reached new highs, suggesting investors remain defensive despite rising prices. The contrast between returns and cautious positioning underscores the complexity of current market sentiment. 

High prices, narrow leadership

Both U.S. and Canadian equities are trading at elevated valuations relative to their historical averages. The S&P 500’s 12-month forward price-to-earnings multiple sits near 19.2 times, almost two standard deviations above its long-term mean, while the S&P/TSX multiple is roughly one standard deviation higher. Analysts continue to raise earnings forecasts, but much of the improvement is limited to the Magnificent 7, where upward revisions have offset declines across the remaining 493 index constituents. This concentration has amplified the market’s reliance on a few large technology names to sustain performance. If earnings growth does not broaden, equity markets may be more vulnerable to shifts in sentiment or economic data. 

A turning point for growth and policy?

The economy appears to be at an inflection point, poised to either slow and contract or reaccelerate amid strong demand. U.S. GDP growth continues to surprise to the upside, supported by technology investment and AI-related capital spending. However, signs of labour market strain have prompted the Federal Reserve to cut rates by 25 basis points to a target range of 4.0%-4.25%. Policymakers noted that downside risks to employment now outweigh the inflation threat, though the longer-term policy path remains uncertain. Markets expect further easing, but with continued strength in economic data and fiscal stimulus expected next year, opinions differ on whether additional cuts are warranted. 

Politics, debt, and pressure on central banks

Fiscal strain and political influence are increasingly shaping monetary and market dynamics. Across developed economies, rising interest costs are testing government credibility and the independence of central banks. In the United States, political pressure on the Fed to lower rates has heightened investor concern, with 71% of economists in a Bloomberg survey expressing worry that future policy may be politically motivated. This fear has supported demand for gold and other perceived stores of value. Similar pressures are evident globally, as governments balance fiscal discipline with the desire to sustain growth heading into an uncertain election cycle. 

Gold, yields, and the search for stability 

The surge in gold prices reflects growing concerns about inflation, debt sustainability, and central bank independence rather than investor exuberance. Market participants are closely monitoring 10-year U.S. Treasury yields and the dollar for early signs of stress in bond markets. Longer-term yields may fall if growth slows, but could rise again if lower rates reignite inflation or weaken currency confidence. In this environment, productivity growth remains critical to stabilizing debt levels without fuelling price pressures. While artificial intelligence has the potential to drive such gains, recent productivity data suggest the effects have yet to fully materialize.