2025 in Review: Addressing Client Questions on the Economy, the Stock Market, and AI

The start of the year was heavy, marked by anxiety over tariffs, AI, and global instability. Yet, that pessimism has evolved into cautious optimism, driven by resilient data and a potential “Canadian moment” to drive reform. Against this backdrop, financial markets have been surprisingly robust. We remain cautious of exuberant valuations and remain committed to our investment strategy focused on core business fundamentals and the long-term. 

Connecting with you has been our priority this year. From our Quarterly Investment Reviews to our annual event featuring Professor Janice Stein, we have kept a pulse on what matters most to you. Inspired by those conversations, we have compiled and answered your most pressing questions on the economy, the stock market, and artificial intelligence (AI).

Question: Is Canada in a Recession? 

Earlier this year, media reports suggested the global economy was headed toward a cliff, as erratic U.S. trade policy created extraordinary uncertainty. While U.S. growth was buoyed by massive AI investment and fiscal stimulus, Canada found itself in the crosshairs of renewed trade friction. Although the Canada-United States-Mexico Agreement (CUSMA) provided essential protection, sectoral tariffs on key exports – aluminum, steel, autos, and energy – continue to drag on volumes. Combined with persistent inflation and slowing consumer spending, our economy has clearly decelerated. However, despite these headwinds, the data indicates we are not currently in a recession.

Structural Headwinds and Policy Inflection

This external volatility is compounded by domestic structural issues, including historically low productivity and reduced immigration flows. While the labour market remains resilient despite a gradually rising unemployment rate, the consequences of years of under-investment in innovation are increasingly apparent. Canada has reached a critical “moment” for a structural shift. The 2025 budget attempts to seize this through investment incentives, infrastructure fast-tracking, and targeted technology support. Yet, these plans carry execution risks and increase the national debt. The public seems willing to grant the government a measure of leeway but will require results in short order. 

Investment Strategy: Positioning for Uncertainty

Forecasting the economy with certainty is challenging, so we anchor our strategy on what we can control: constructing a diversified portfolio of high-quality companies at reasonable valuations. Our definition of quality goes beyond a purely defensive posture; it demands, among other things, that companies possess enduring competitive advantages and management teams capable of adapting to any economic environment. Further, by diversifying across sectors and geographies, we avoid the need to guess which areas will win at any given moment. Staying disciplined on valuation provides us a margin of safety against the possibility of market volatility.

Question: Is the Stock Market Heading for a Crash?

This is arguably the most frequent question we receive, yet it gets the least satisfying answer: “we don’t know.” While arguments for a correction abound – including elevated valuations, high concentration, AI exuberance, and geopolitical instability – these factors are not reliable timing signals. The mere presence of risk does not make a crash imminent, nor does it tell us when one might occur.

Valuation and Concentration Risk

While markets always face a complex web of risks, two are currently top of mind: valuation and concentration. By most conventional measures, the S&P 500 is expensive. While the “Magnificent 7” and AI-related stocks drive much of this, the broader market also trades above historical norms. Furthermore, concentration is concerning; nearly 38% of the S&P 500 is now held in just eight AI-related stocks, a historic imbalance.

Should Investors Move to Cash?

Our answer is a definitive no. Consistently timing market tops and bottoms is impossible and the cost of missing the subsequent recovery far outweighs the benefit of sitting in cash. We view risk as the permanent loss of capital or the failure to meet one’s financial goals, which we manage in two ways:

1. Strategic Asset Allocation: Your individual asset allocation (the mix of cash, fixed income, and equities) is custom-designed and periodically reviewed based on your goals and risk tolerance. This allocation remains stable unless fundamental life circumstances change.
2. Investment Philosophy: We mitigate risk by focusing on quality, value, and diversification with an unwavering eye on long-term outcomes. My colleague Alex Jemetz, Vice President, Head of Client Service & Wealth Management, recently reviewed the merits of our investment philosophy in this blog entitled “The Asymmetry of Returns: An Ode to Quality Active Management”. 

While market worries persist, we focus on what we can control: protecting and growing your capital through personalized asset allocation and high-quality investing.

Question: How Is Nexus Investing in Artificial Intelligence? 

AI is Revolutionary

AI has rapidly captured the world’s attention, and for good reason. It represents a revolutionary technology promising to reshape nearly every aspect of business and life, sparking a generational investment boom. We are optimistic about AI’s potential to deliver a step change in global productivity, accelerate scientific and medical breakthroughs, and supercharge automation. Internally, we are piloting numerous AI tools, focusing on appropriate safeguards and adding business value. My colleague Harsh Narsinghani, Vice President, Portfolio Manager, provides further depth on our approach in this blog “Navigating the AI Exuberance Without Losing Our Bearings”. I review some salient points below.

Enthusiasm Attracts Undisciplined Capital

The rapid development of AI presents a double-edged sword for investors. History shows that technology revolutions, from the steam engine to the internet, often generate intense excitement. This enthusiasm inevitably draws in excess capital and irrational behavior, which amplifies market cycles. We recognize that this phase is often characterized by elevated valuations and speculation, necessitating a highly disciplined approach to investment.

Lessons from History: Past Technology Booms

The quote “History doesn’t repeat itself, but it often rhymes”, attributed to Mark Twain, remains highly relevant today. It is easy to draw parallels between the current AI investment frenzy and the dot-com boom of the late 1990s. We are once again witnessing massive capital deployment in companies lacking a clearly monetizable “product” or reliable path to profitability, and the return of circular vendor financing. Predictable financial returns often appear to be a secondary priority.

Our Posture: Caution, but not Avoidance

We view this environment through a lens of historical prudence and discipline, which helps us identify where tangible, long-term value may be created. Within our portfolios, we participate in the AI revolution in a careful and measured manner. We own several established companies participating across the entire ecosystem, including those focused on core AI models, data centers, and software development as well as companies using AI to make advances in data analytics and automation. Our fundamental, long-term view consistently brings us back to investing in companies with strong, enduring competitive advantages, regardless of the prevailing market enthusiasm.

Our Focus Moving into 2026

As we look ahead, we cannot predict what will transpire. It is plausible that AI exuberance continues in the stock market, Canada experiences a recession, or the market undergoes a correction – or perhaps none of this happens. It is just as likely that other issues will arise that most investors have not yet considered. Since we do not control these factors, our focus remains squarely on the variables we can control: protecting and growing your capital through personalized asset allocation and applying our philosophy of quality, value, and diversification.