Hello and welcome to Download. I'm your host, Dave Richardson. And we have a very special guest today to whom I owe a big apology. We are blessed on this podcast, and you know this if you listen regularly—and if you don't, subscribe where you get your podcast, follow us on YouTube, and give us a five-star rating, all of that stuff—but if you don't listen to us regularly, you're about find out why you should. We've just got so many great people to draw from, to bring on to the podcast, to give you updates on what's going on all around the world. We have so many people to draw from that I forget people at some point. So we haven't had our guest today, Eric Savoie, on for quite some time. I was at a conference last week, and he gave one of the important speeches at the conference, and I went, wow, that guy is so good. When have I had him on the podcast? Eric, when was the last time you were on? Last year or January?

I don't know. Yeah, it's been a while, but happy to be here once again.

It's great to have you. And the presentation was so good. What we haven't done on the podcast for a while is do a general overview of what's going on in markets. We get Eric Lascelles on and he focuses on the economics. But looking at all the markets, things around tariffs, inflation, US dollar, Fed Reserve, stocks, fixed income. Just to get a general idea, your point of view on things would be fantastic for investors as we head into the summer. You might have some thoughts on that. Where do you want to start, Eric? It's a fair game. There's so much to cover.

Sure. There’s been so much going on all the time. It seems this year, every week, the narrative shifts quite drastically from a macro perspective. I think it makes it for quite an exciting year, at least so far, in terms of being someone who's analyzing the ins and outs of what's going on from a policy perspective, particularly from the US, with what Trump is doing on the tariff front and then how financial markets are responding. So we can go in any which direction you'd like, but maybe some quick comments on some of the key themes that we're seeing so far this year. Really, the big one for us, the bottom line is that uncertainty is very elevated. And most of that uncertainty is coming from the US in terms of their policy on the trade front. As you know, Trump's approach to negotiation is very volatile, and he flip-flops a lot. But I think the big takeaway, at least for us, is that when we look at all the potential headwinds to the economy coming from tariffs, we think the worst-case scenario that we might have imagined earlier in the year seems to be off the table. Even as much as Trump is coming back on with threats in the last couple of weeks, he's shown an ability or a willingness to want to negotiate. He comes in hot with a very high number in terms of the tariff rate, but then he typically will back off or even lower the rate or even change his mind entirely. In the grand scheme of things, uncertainty is still elevated, particularly in the short term. But the economy, at least so far, has held up relatively well. I think that's something we want to acknowledge, just the resilience of the economy, particularly the US economy, but also the global economy. There are a few other positives that we might want to consider or pay attention to. One is the big, beautiful bill in the US. That will have a net stimulative effect on the economy, perhaps impacting or supporting the economy through 2026. The other one is just the big theme around artificial intelligence. I think everyone is aware of this big theme and maybe not fully understanding the ramifications of the drivers of artificial intelligence. But really, not only will artificial intelligence provide productivity gains for companies, but there's also significant investment that's going on behind the scenes to fuel all of this. It's not just the chip manufacturers, but all the infrastructure associated with housing all of those computer chips and then also powering them. There's significant energy demand that's coming from all of this. All of that, over the coming quarters and years, will serve to provide some benefit for the economy. In our view, uncertainty is elevated in the near term, but we think ultimately our base case is no recession, and then perhaps even a little bit better growth next year as some of these positive themes really take hold.

I think it's really important, though, Eric, and I keep saying this to everyone who comes on, when I'm out with investors, when I'm out with advisors—and I'm out a lot—I'm trying to highlight to them, despite all the uncertainty, all of the noise, all of these scares around tariffs—and I'll give you a really very specific point that I want to highlight so people make sure that they capture this and lock it into their minds—but despite all of this, it has been a very good year for returns. Stock markets around the world have done quite well. Now, a lot of volatility in currency markets, which means you've got to watch what you're actually making in Canadian dollars as a Canadian investor. Fixed income hasn't been perhaps as good as we might have hoped, given that the Fed started cutting rates last year, as did the Bank of Canada, but overall, despite all the noise, it has been a very good year. We've talked a lot, Eric, about the emotions that sometimes individual investors have when they're investing versus professional investors like yourself and professional analysts whose career is in the business. And it's the idea of the emotions. But Trump seems to even break through that. He breaks through even professionals. I think it was yesterday, actually—we're taping this on Thursday afternoon—there was a rumor that floated through the New York Times that Trump was going to fire Jerome Powell, who's the head of the Fed Reserve. The Fed Reserve is the central bank in the United States. They run monetary policy. So that's currency, that's interest rate, short-term interest rates. A very important role. And historically, they've been very careful to keep a separation of powers between the central bank, the Federal Reserve, and the presidency, even though it's technically an arm of the executive branch in the US. Just the floating out of this rumor, the Dow Jones Industrial Average dropped 400 points in a matter of minutes. People panicked and sold off that rumor. About 10 minutes later, he comes on and says, no, I would never fire the guy. That would be really bad. I don't even know if I'm allowed to fire the guy, which is actually up for debate. And the market just pops right back. So if you react to that in the moment, just on the bluster and the rumor and the tweet or whatever it might be, you can get caught in this. So don't get emotional about stuff. Be clinical, be objective. Don't overreact. I'm going to guarantee you over the next three and a half years, there are going to be another 50 times that something like that's going to happen like yesterday. And you don't want to get caught up. Sorry for my little diatribe there, Eric, but I wanted to get that in. I was driving into the office and I'm listening to the business channel and they're talking about it. It's like, all of a sudden the market's dropping. What's going on? It's something in the New York Times. And then, just in a matter of minutes, it's just like a V up and down. So don't get tied up in emotion. Listen to the professionals. Stay objective. And we want to be objective about this, because a lot of things on both sides around inflation and the impact of the tariffs on inflation. So what's your thinking around where we're sitting with inflation? We had inflation reports out this week. What did you think of those? And how should we think of where inflation is heading right now?

Yeah. I would echo your point on not overreacting to the day-to-day fluctuations in the news flow, because you can really make some big mistakes. Typically, markets trend higher over the long term. Even during periods of economic weakness or a recession, we know stocks tend to go down a lot. Usually, investors overreact to that, and recessions end up being very good buying opportunities for the long term. As an investor, the worst thing you can do is sell into widespread fear because those are the worst times to do that. Probably what you should be doing is the opposite.

Yeah, look for opportunity in volatility, which is what Stu Kedwell always talks about when he's on Stu’s days with us.

Exactly. On the inflation front, of course, a very tricky situation given the tariff backdrop. On the one hand, tariffs act as a headwind to the economy, but they should also, on the other hand, potentially cause an upward lift to prices. If you think about it, companies in the US would be subject to higher import costs as they bring in goods from offshore. They will likely be inclined to pass some of that onto the consumer. So ultimately, the consumer will likely face higher prices. Again, there's a lot of questions around this, depending on how high or how long the tariffs remain in place, how high will that elevate rate? If it actually passes, will it remain in place for a long period? There's still a lot of questions. Will companies find ways to circumvent the tariffs or find ways around them? Or will they find other operational efficiencies which allow them to absorb that cost? And so there's still a lot of questions around that. But the inflation picture looks pretty good in our view. As you said, some inflation prints have come out this week, looking pretty decent. In Canada, we're just right around that 2% objective. In the US, just slightly above. I'd say, very close to it. And remember, just a few years ago, we were closer to 7, 8, 9% on the inflation front. And so there's been a significant improvement on that front. We expect the inflation picture to be fairly benign over the next couple of years, pretty close to that 2% level. But we think maybe in the near term, there is a risk that we get some slightly higher upticks to that inflation print just as the tariff effect really comes through. We could see maybe closer to 3% at some point over the next several quarters. But ultimately, our view is that at some point in 2026, inflation will settle back toward that 2% level, which will be a good level for central banks to either confirm the current policy or even provide some further accommodation, particularly in the US, where rates are still quite elevated.

Yeah. That takes us to the Fed, out of what I was talking about the announcement, the rumor yesterday, and then where we come with several more Fed meetings this year. What are your thoughts on the Fed cutting rates? Do you think they're going to continue to sit on hold, or do you think that we might see some relief in the near future or at least sometime this year?

I think it's made sense for Powell to be pretty patient here. If you think about what's the Fed's mandate or what is their goal, it is to ensure price stability. Really, their main tool for achieving that is setting interest rate policy. But if you think outside of that, there's so much instability or uncertainty coming into the system from a US administration perspective, so from Trump and the tariffs and all that. It's almost like that uncertainty is clouding or dwarfing the impact of monetary policy. As Powell has iterated in the last several meetings or press conferences, there's just so much uncertainty still as it relates to the impact of tariffs on inflation, that he would rather just wait it out and to see what will that impact ultimately end up being. He would like to see more clarity. He can afford to be patient because the economy actually has been quite resilient in the US. The unemployment rate is still near historic lows, job gains are coming in month after month, and so there really is no immediate need for the Fed to cut rates. But we think at some point, as we do get more clarity into the fall, probably, the Fed might be in a position where it resumes rate cuts. If you think about it, the Fed is still quite high in terms of its interest rate relative to other countries around the world. We've seen quite a bit of easing in Canada, in Europe, and elsewhere, and then the Fed has been on hold all throughout this year so far. Still at around 4.5% interest rate in the Fed funds rate versus our models would suggest an appropriate rate is closer to 3%. So we think ultimately they will move in that direction, but probably it will be more clear on the timing later in the fall, maybe November for the first cut. We don't know for sure. There's still a lot of time between now and then, but we think at some point later this year, the Fed will resume its interest rate cuts, and that will probably flow through into 2026, where we expect something like three rate cuts over the next 12 months.

Oh, wow. Okay. Is there any validity to what Trump talks about with respect to cut interest rates, that will actually save us money in terms of servicing the debt? The Fed set short-term interest rates, other rates are set out in the market. So is that a valid point or is that a red herring that he's throwing out there just to drum up support to put a little pressure on Powell to lower rates?

I'm probably not the expert on that specific topic. The government's debt is not just all short-term interest rates. There are a lot of longer-term debt. Whether Powell cuts rates at the shorter end might have some impact in terms of lowering long-term bond yields, I think the main goal in terms as it relates to concerns around the debt is to get long-term yields lower. Of course, the Fed doesn't have any say over that. You can see Trump's frustration when he keeps calling for lower interest rates and yields. Actually, in the last few weeks, yields have been going up. I think that's against what the administration is trying to achieve. Although the administration only has so much power on influencing market pricing. And really the Fed is an independent entity from the government. The Fed will do what it needs to do to ensure price stability based on what it sees and the variables that it's monitoring.

So maybe a better question that I know is right up your wheelhouse. Fixed income overall has not been fantastic. It's been a pretty boring fixed-income market, old short-term government bonds. The longer end of the yield curve, as you just mentioned, has actually been drifting a little bit higher. Given what's coming out of the big, beautiful bill, given some of the concerns around inflation coming out of tariffs, is the fixed-income market an attractive place? I know that, generally, when we've bumped up against 4.5% on the 10-year treasury yield, that's generally been a spot where people take a look and that it has tended to reverse course and head back down towards 4.25%. But where do you see things right now?

Yeah. In our view, we actually feel pretty good about the fixed-income market. And the rise in yields that we've seen, if we look within our model, most of that rise is coming from an increase in real interest rates. It's not so much investors being concerned on inflation, at least the way that we disaggregate our model. And so there is a growing concern out there in the investing community on elevated debt levels sitting at the government level. That is a valid concern. Investors are basically saying, we demand a higher premium for taking the risk of holding government debt. And so ultimately, from an investor standpoint, actually, that means that investors are going to be receiving a higher compensation for holding that debt. And so sure, in the short term, maybe a little bit of volatility coming from that as yields potentially could creep even a little bit higher from here. But over the longer term, we think that serves as an actual benefit for fixed-income investors. Our models would suggest that over the medium to longer term, an appropriate level for the US 10-year yield should be closer to 4% and maybe even drift a little bit lower as time goes on and some of these concerns dissipate. Maybe yields can drift a little bit higher above 4.5%, maybe closer to 5%, but really, if you think about it, that's not a big decline in the value of the bond. When you think of a 5- to 10-year horizon, that basically boosts your return potential. We feel pretty good about the bond market, and we think the risk-reward for bond investors is pretty minimal at this point because even if yields go a little bit higher, we just don't see a scenario where they go significantly higher. At least not on a sustained basis, we would place very low odds of that happening and much greater odds on the opposite happening or even yields just being fairly stable or range bound over the year ahead, which should lead to something like mid-single digit returns for fixed income investors, potentially a little bit more if the economy really were to suffer a downturn. We feel pretty good about that, especially within the context of a balanced portfolio. It's a good hedge or an offset against equity market volatility and it provides that diversification.

Yeah, I'm really glad you brought that up because it is so important. Those returns are actually slightly above average, if that's the way it plays out in fixed income. We're going to move to the stock market in a second, but with the volatility in the stock market, all the uncertainty that's out there, bonds are a nice cushion against that volatility in the stock market. Nice insurance, I guess, would be a more technical way of thinking about it. That's always nice. And as you say, higher rates for many of the listeners here who are earning income off of their investments, that's not an awful thing either. Although I know us younger folks, we like those lower mortgage rates. Anyways, that's always the balance. Okay, let's piece that together. That’s fixed income, the interest rates, the Federal Reserve, the tariffs, inflation, we've covered all that. Let's get to the stock market. What are you seeing when you're looking at stock markets around the world?

Stock market so far this year, we've seen epic volatility. It's been a wild ride for sure. Earlier in the year, the tariff threats have come in. A lot of uncertainty around that, a lot of fear caused a big panic in the stock market. We saw 20% declines in some of the major indices in March and April. But since then, we've had a truly massive recovery and extremely quick, too. Basically, if you didn't look at your portfolio for three or four months, you would have thought, nothing really happened, despite this massive V-shaped bottom and then recovery. Now, as you've seen progress on the trade front, I think investors are just more and more catching on to the idea that Trump is unlikely to let the tariff situation really cause sustained weakness in the economy or in the stock market. If you think about it, Trump probably doesn't want that. As much as he seems okay to cause volatility, he doesn't want lasting damage in the economy and the stock market. At every instance where there's been too much pain in the market, he reverses course. We've seen that pattern emerge time and time again, which I think is giving investors greater confidence that they should probably ignore short-term volatility or perhaps even discount a lot of the threats that are being made. On one hand, perhaps the stock market is right in doing that, but on the other hand, perhaps the stock market is getting a little bit complacent as stocks are rising to record levels once again. As you mentioned, the returns so far this year have been quite good, but especially from the bottom in April, the Nasdaq is up 35% from its April low, the S&P is up over 25% from its April low. There's been some really big gains that have occurred. Valuations which were more appealing two or three months ago are now getting stretched and getting quite expensive again, particularly in the US. If we look globally, we don't necessarily see valuation concerns, but if we look specifically at the US, and particularly at US mega-cap technology stocks—so these are the stocks that are driven mostly by the benefits of AI and the theme around that— those are getting quite expensive. Overall, we think the stock market at this point is pricing in a pretty favorable outcome. There's not much further room for the stock market to really surprise on the upside. Certainly, if things continue to play out in a favorable fashion, if Trump continues to dial back his threats on tariffs, if the economy continues to grow, inflation, as we talked about, if all of these things move in a favorable direction, the stock market can continue to climb for sure, and we should not ignore that possibility. We always run some scenario analysis on what we expect for the market, and that positive scenario is always a potential outcome. But at this point, we also should consider that there are some other possibilities. If some of these threats really materialize in a negative way or if some other risks surface, the market at this level might be a little bit more vulnerable, at least in the short term. Of course, as we talked about earlier, the market will go through periods of volatility, there will always be something to scare investors from time to time, and the market will pull back, of course, at some point over the next several months and quarters. But we think, long term, there's a lot of reasons to be optimistic as earnings are expected to continue to grow. Even with the threat of tariffs, the consensus is penciling in 8% earnings growth this year, 14% next year, another 14% the year after that. Of course, these are estimates and subject to wide ranges of uncertainty. But if that continues to play through, if companies continue to adapt and find ways to continue growing, even with the tariff threat looming, long term, that should be a pretty positive outcome for a stock. You could still get mid-single-digit returns out of US equities, we think even higher than that. Maybe high single-digit returns out of some of the international markets where valuations are more appealing. This valuation concern that we see within the equity market is really just a US large-cap story. If you step outside of that into international markets—or even within the US, if you step out of the large-cap space and into the mid- and smaller-cap space—we see a lot of attractive value in those parts of the market. To the extent that the economy can continue to grow, perhaps you see pretty good returns emerge from some of those markets that just have not participated as much in the last couple of years. So overall, I would say potentially limited upside in the very near term. Just given the extent of the massive rebound that we've seen, it would be difficult for the market to continue to rise in a straight line. And so we might expect a little bit more choppiness in the months and quarters ahead. But ultimately, we still feel pretty constructive in the long-term trajectory as likely to be higher.

Yeah, it's pretty clear the market is saying that a year out from now—because the market looks out around a year—interest rates will be lower and earnings will be higher, growth will be good. And those numbers that the market is expecting, we need those earnings numbers to come through. And there's lots of reasons to believe that that can happen. One of them, which you touched on in your first comment, is artificial intelligence. Are we going to start to see that really impact the bottom lines of some of these companies where the expectations for their earnings growth are just so enormously high?

Well, that is the expectation. The expectation is certainly quite optimistic. So the risk is that we've expected too much. And even if those companies do deliver very attractive earnings growth, if it doesn't measure up quite to what is priced in, perhaps the market could react negatively to that. But if those promises of better earnings and better margins and better efficiencies and all of that comes to fruition, then certainly the market will react positively to that. As much as a lot of the AI-specific companies are pricing in some benefits to the extent that this AI benefits all companies. Think of companies like Walmart or grocery stores or companies that you wouldn't necessarily think of as technology companies, if they embrace this technology as it becomes more available to them, as it becomes easier to use, perhaps even those companies that we might not even think of start to unlock the benefits of artificial intelligence in ways that we might not have imagined. The potential is there. The market is certainly pricing in an optimistic outcome. We will see what will happen. It'll all be clear to us in the next few quarters.

As long as it doesn't turn into the Terminator, we're good. It should help the bottom line. So with all that, Eric, how do you put it all together into the positioning of your portfolio right now in terms of what makes sense, given all of that uncertainty that you've been talking about? Where would you recommend that people have their portfolio relative to their target asset mix?

When I look at asset mix, I'm thinking in the context of our recommended asset allocation for a balanced investor. This is the asset allocation that we publish from the RBC Investment Strategy Committee. Given the heightened uncertainty that we see, at least in the near term, we think it's important to be well diversified. That's probably the main takeaway. Diversification is really critical in an environment where there's heightened uncertainty. Our asset allocation reflects a couple of things. One is a bit of caution on the equity front, given the heightened valuations and the big move that we've seen. Then also the fact that we feel quite good about the fixed-income market. We're just juggling those two things within our asset mix. Our asset mix is fairly close to our neutral allocation. If you think of 2% cash, 38% fixed income, 60% stocks as a neutral, we're very close to that. We are just slightly overweight stocks at the moment with a 61% weighting, so we're 1% overweight. We added to equities in the downturn earlier this year, and we're maintaining that slight overweight exposure at the moment, which we think is the right amount of risk to be carrying at this point. We want exposure to that upside, but maybe not too much if things turn out to not come out as good as the market is pricing in. Then the other thing that we've done is within that equity allocation, we've done some shifts regionally. Given how expensive the US market is—we're a little bit concerned about valuations there—we've tilted away. We've reduced our exposure to US equities within that 61% bucket, and we've tilted in favor of other regions outside the US or more international, so emerging markets, Asia, and in particular, European equities where valuations are much more compelling to us and where we think return potential is more elevated. That's how we're tying everything together. A bit of a cautious positioning with a slight risk on tilt at the moment. When you think about it, it puts us in a really good position. In the scenario where things play out very favorably and the stocks continue to rise, we will capture that upside to a small degree. But in the other scenario where there's a more volatility, sitting close to neutral, it gives us the opportunity or the ability to respond to that and maybe make some adjustments to take advantage of the volatility if it were to arise.

Yeah. The way that you talk about the bond market and where the bond market is sitting. It's always, what's your potential upside? But then, what's your potential downside? Which gives you your risk, the downside, and your reward, the upside. The risk-reward in the fixed income market is quite favorable, as you point out. You want to make sure you're capturing some of that, especially if you're a more balanced or conservative investor, but you don't want to miss out on the stock market. You want to be there, but you can hold a full weight of your fixed income as that counterbalance. You're going to do well in both, but you're going to manage that risk, which is so critical when there's this much uncertainty around inflation, interest rates, tariffs, etc. It just seems like such a sensible positioning right now.

Yeah, exactly.

And that's why you're the sensible guy running that stuff. So Eric, that was fantastic. We can't forget you again. We'll make sure we get you on at least once a quarter. It's always great to catch up with you. And you were just phenomenal at that conference last week. So congratulations on that, because that's a tough spot. You were speaking in front of all of your colleagues and peers and your bosses, too.

Yeah, and my boss.

The toughest place to do a presentation is in front of a bunch of people that know almost as much as you. You're always walking on eggshells. I thought you did a fantastic job navigating that challenge. Anyways, thanks for last week. thanks for this, and we'll talk to you soon.

Great. Thanks. It was a pleasure.