Q4 2025 market update: Hopes rising for interest rate cuts

Explore fourth quarter 2025 economic data, market performance, US-China trade truce, and what investors can expect in 2026.

The fourth quarter of 2025 saw equity markets reach new record highs and a significant US-China trade truce. Read on for our view of the economy, market performance, and outlook for 2026.

Highlights

  • Canada’s labour market stabilizes
    • Canada’s economy added jobs over the quarter, pushing the unemployment rate to its lowest level since 2024.
    • Strong labour demand and more clarity on the impact of tariffs helped Canada’s job market.
    • The Bank of Canada (BoC) held its policy interest rate steady in December after lowering it in October.
  • The U.S. Federal Reserve Board (Fed) continued to lower interest rates
    • The Fed lowered its policy interest rate by 0.50% over the quarter, taking the target range to 3.50%-3.75%.
    • Slowing economic activity and softening labour market conditions prompted the reductions
    • U.S. inflation rate remained above the Fed’s 2% target.
    • The Fed anticipates one additional rate cut in 2026 to support employment stability
  • The U.S. and China agreed to a one-year trade truce
    • U.S. and China agreed to a one-year trade truce, reducing some trade uncertainty.
    • The U.S. agreed to lower tariffs on Chinese products, while China will remove export restrictions on rare earths metals.
    • Agreement helped alleviate investor concerns over global economic stability

Global trade remains in the spotlight

Global business welcomed the October announcement of a one-year trade truce between the US and China, significantly reducing investor uncertainty. The U.S. agreed to lower tariffs on China, while China agreed to remove its restrictions on rare earths exports.

Canada's pursuit of a trade agreement with the US stalled when President Trump suspended trade talks. The Ontario government funded an ad that spoke about the drawbacks of tariffs. A sectoral trade deal was then off the table.

Despite these setbacks, Canada strengthened trade ties with several countries and regions, which helped improve export performance. Notable progress included discussions with China and India -two economies that have large markets and would benefit Canadian industry. However, tariffs continue to impact key sectors, including steel, automotive, lumber and aluminum. The federal government has committed to support these industries, while the “Buy Canadian” initiative may help these tariff-hit sectors and Canada’s labour market.

How are large economies doing? 1

  • U.S. economy grew at an annualized pace of 4.3% in the third quarter (as reported in the fourth quarter).
  • China’s economy grew by 4.8% year-over-year.
  • Europe’s economy grew by 0.3%.
  • The U.K. economy grew by 0.1%.
  • Japan’s economy shrank by 2.3%, annualized.

1Bloomberg Finance L.P.

Equity markets advance 2

  • Global equity markets rose over the quarter.
  • North American equity markets reached new record highs.
  • Equities in Canada, the U.S., EAFE, emerging markets, Europe, the U.K., Japan and China gained.
  • Global bond prices moved slightly higher while bond yields increased. Global bond investors continue to earn higher income than they were before the COVID-19 pandemic.
  • Canadian bond prices declined while bond yields increased.
  • The price of oil declined. The Organization of the Petroleum Exporting Countries (OPEC+) said it would pause production increases in the first quarter of 2026, in large part due to concerns over a developing supply shortage.
  • Gold prices rose and reached a new record high over the quarter.

2Bloomberg Finance L.P.

Central banks lower interest rates 3

Several major central banks lowered interest rates over the quarter to support their economies. The US Fed expects one interest rate cut in 2026. The BoC may continue to hold its rates steady if economic conditions evolve as expected.

  • BoC lowered its policy interest rate by 25 bps to 2.25%.
  • The Fed reduced its federal funds rate to 3.50%-3.75%.
  • The European Central Bank held steady.
  • The Bank of England reduced its policy interest rate by 25 bps.
  • The Bank of Japan increased its key interest rate to 0.75%.
  • The People’s Bank of China held its loan prime rates steady.

3Bloomberg Finance L.P.

How is Canada’s economy doing? 4

Canada’s economy expanded over the third quarter of 2025, driven by higher exports and increased government capital spending. Prime minister Carney committed in the Federal Budget to transform Canada’s economy and reduce dependence on US trade, his government has strengthened relationships with international partners beyond the US. However, US household consumption declined as consumers reacted to trade.

  • Canada’s economy grew by 2.6%, annualized, in the third quarter.
  • Exports increased by 0.2% during over the quarter, despite ongoing trade tensions with the U.S.
  • Economy benefited from higher government spending, particularly on defence.
  • Household consumption declined slightly amid economic, trade and labour market uncertainty.
  • Federal Budget committed billions in spending to help transform and strengthen Canada’s economy. In response to the planned spending increase, the budget will bring with it a larger-than-expected deficit.
  • Unemployment rate fell to 6.5% in November, its lowest level since July 2024.
  • Inflation rate was 2.2% in November, holding near the BoC’s 2% target.
  • Canadian equities advanced and reached a new record high. The Materials and Consumer Discretionary sectors were the strongest performers. Real Estate posted the weakest return.
  • The 10-year Government of Canada bond yield rose to 3.43% by the end of Q3 2025.n anadian bonds continue to deliver relatively strong income to investors.

4Bloomberg Finance L.P.

What can investors expect in the future?

Factor Outlook

Canadian economic activity

Lower interest rates, contained inflation, project spending and fiscal support should benefit Canada’s economic growth in 2026. The economy faces risks but has proven its resiliency despite a fragile relationship with its largest trade partner.

Canadian trade deal

PM Carney said a sectoral trade deal with the U.S. is unlikely in the short-term. Discussions will likely roll into the Canada-United States-Mexico Agreement, which comes up for review in 2026. Canada’s efforts to diversify trade has had a positive impact on the economy, as evidenced by higher exports to other nations around the world.

U.S. interest rates

The Fed lowered its policy interest rate three times in late of 2025. At its last meeting of the year, its outlook showed expectations of one rate cut in 2026. Chair Jerome Powell’s term comes to an end in April 2026.

AI spending

There were several major AI deals in the Q4 2025 and that could continue into 2026 as the race to become the leader in AI continues. Infrastructure and semiconductor chips remain at the center of most deals. However, there is concern an AI investment bubble may be forming, leaving investors to exercise caution.

China’s domestic spending

Retail spending in China slowed, raising calls for the government to do more to stimulate consumer spending. Industrial output could return to normal levels with a U.S. trade truce. Stronger domestic demand may help boost economic growth.

Oil prices

OPEC+ said it would pause production increases in the first quarter of 2026. The potential for stronger demand in response to better economic conditions could raise oil prices.

This commentary contains information in summary form for your convenience. Although this commentary has been prepared from sources believed to be reliable, Sun Life can’t guarantee its accuracy or completeness. Plus, this commentary is intended to provide general information and should not be seen as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life. Please note, any future or forward-looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Data from Bloomberg Finance L.P. as of December 31, 2025.