Sneak peak – Our plan for next week’s ethos is to dive back into AI. Not from a bubble / not bubble perspective but a framework to understand market exposure to AI. AI exposure has become pervasive. Not just in the tech space, ranging from hyperscalers, chips, memory, routers to fiber, but industrials, energy and utilities. And its global, emerging markets arguably have more AI exposure than the S&P, Japan has lots from hardware, Europe & Canada less exposure. Finally, what kind of exposure? Enablers, LLMs, infrastructure, etc. Understanding AI exposure is becoming increasingly important. It will be a fun one.
For today, we are going to talk about something equally exciting, the Canadian consumer. The global economy is in good shape largely thanks to tech spending, fiscal stimulus, a manufacturing upturn and a spendy consumer. Yes, the consumer is bifurcated into the wealthier and less wealthy, with the less wealthy struggling. But it has always been the wealthy consumers globally that have had a bigger economic impact (past ethos on this: Don’t Fret the K). So, let’s check in on the wealthy consumer then turn to Canada.
We have some good news and some troubling news. On the good side, our tracker of higher end consumer spending remains decent. This includes cosmetic, sit down restaurant and luxury brand spending. This measures either same-store-sales or overall sales on a year-over-year basis, which mitigates seasonality factors. The downside: this is quarterly data from earnings, so important but slow. And we know in this world, nothing is allowed to be slow.
So, we will combine our slower High End Consumer canary measurements with card spending data on categories that are more discretionary. The trend of this type of consumer spending has been falling pretty fast. Perhaps the higher energy prices are starting to take a bite. Of additional interest will be the slower readings once Q2 earnings reporting season is done.
We typically focus on the U.S. or European consumer, but the Canadian consumer matters too. Especially for us Canadians. Unfortunately, we don’t have the depth of data on the Canadian consumer compared to the U.S., but still enough to work with. Not overly surprising, the Canadian consumer has been struggling a bit more. Based on retail sales, inflation adjusted, spending has flatlined starting early in 2025 and has remained so since. As have the more discretionary categories. Flat isn’t bad. Employment, which has seen a bit of an upturn of late, has certainly helped on the consumer spending side.
Despite the consumer hanging in, Canada has posted two back-to-back quarters of negative GDP. A rule of thumb is two consecutive quarters of negative GDP is a recession. We don’t buy that. Recessions are like pornography, you can’t really define it, but you know it when you see it. The negative GDP was largely triggered by trade and inventory volatility, which isn’t good news, but not a recession just yet. The trend in investment is not encouraging but rising exports are. Let’s just say the Canadian economy is fragile.
Fortunately, the market really doesn’t care. Even with the Canadian economy near stall speed, the TSX marches upward. One could attribute this to the TSX weighting in energy, materials and technology, sectors not so sensitive to the domestic economy. But that doesn’t add up. Energy is up this year but the other two are down, for a net contribution of a little more than 1%. The Financials are the biggest lifter for the TSX, with the six big banks contributing 7.5% of the overall market advance. Let’s hope the banks can keep ignoring the economy.
Final Thoughts
This market continues to be dominated by AI related news and excitement, either ebbing or flowing. The other big factor is flows, which remain strong. That has helped the Canadian market and contributed to this divergence from what is going on within the economy. The Canadian economy has cooled, and the U.S. consumer appears to be showing some softening signs as well. For now, the markets don’t care, or mind. But if the data gets worse, we will wake up one day and realize the market decided to start caring. Until then, party on.
— Craig Basinger at Purpose Investments.
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Sources: Charts are sourced to Bloomberg L.P. unless specified otherwise.
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