Douglas Porter

November 21, 2025

If Einstein’s E=mc² was applied to stocks, one could arrive at Equity prices = momentum × confidence (squared); and neither momentum nor confidence are pointing in the upward direction at this point. Of course there are more fundamental factors at play beyond sentiment. In an important week of tests on the earnings and economic fronts, markets handed out unsatisfactory grades. After wobbling through the first two weeks of the month on valuation concerns and a murkier Fed outlook, equities stumbled further, with the Nasdaq shedding roughly 3% and now down 7% from its recent peak. Nvidia’s highly anticipated quarterly earnings didn’t disappoint, but they also didn’t manage to dispel the market’s newfound cautious mood.

On the economics side, the data dam has finally opened up, and the flow of information is gathering pace. Confusingly, we saw economic releases from no less than four different months this week (all the way from August to November), requiring some deft analysis. But it was the heavily delayed employment report for September that captured most of the attention. While a tad stale, it was nevertheless viewed as an important indication of the economy’s strength heading into the government shutdown, and the last full jobs report the Fed will see before the December 10 FOMC meeting. Alas, it did not clear the muddy waters, as for every strong action, there was an offsetting soft reaction. To very briefly recap:

Payrolls rose 119,000 in September, more than double expectations and the best since April. But, the prior month was revised down to a drop of 4,000 (from +22,000), and year-on-year growth has slowed to a modest 0.8% pace, the lowest since 2021 (it was 1.3% pre-pandemic).

Reinforcing the more dovish lean, average hourly earnings nudged up just 0.2% m/m, a tick below consensus. But, there were upward revisions to prior months, leaving earnings up a sturdy 3.8% y/y. That’s still up almost a percentage point from pre-pandemic norms.

Aggregate hours worked edged up just 0.1% m/m, and were about flat for all of Q3. As a key building block for GDP, that alone would point to very modest growth last quarter. But, there are growing signs that the boom in AI spending is lifting productivity, and it still looks like Q3 GDP was solid (around 3%, or even better according to some).

Finally, the companion household survey (which, sadly, will never be available for October) showed an even stronger job gain of 251,000. But, an even larger increase in the labour force meant that the unemployment rate still rose a tick to 4.4%. That’s the highest rate in nearly four years, and is nearly a point above pre-pandemic levels. Notably, the unrounded rate was higher yet at 4.44%. While the jobless rate isn’t ratcheting higher—it’s only up 0.3 ppts from a year ago, so not in Sahm Rule land—its direction of travel is clear. And, many Fed officials view the rate as the single most reliable indicator of the jobs market, a view we share.

The bottom line from the murky mix was that the job market is still softening, but not falling off the table. Combined with the wobble in risk assets, this was enough to bring the possibility of a Fed rate cut in December back into play. Even with a variety of Regional Presidents openly questioning the need for another cut just yet, markets now see better than even odds of a trim next month. Our call has been for a December move for some time, and we will maintain that for the time being. Perhaps more importantly, the market is almost fully back on board with our broader view of a total of 100 bps of additional easing by the end of 2026, which would take rates to the very low end of what’s now considered neutral.

In sharp contrast to the near-term outlook for the Fed, there is precious little debate on the Bank of Canada. Even those of a more dovish bias (ahem!), would readily allow that with core inflation stuck above 2½% and a recent upside surprise in jobs, it’s unlikely the Bank will cut anytime soon. This week’s Canadian CPI was a touch on the firm side of expectations at 2.2% y/y on the headline and a meaty 2.7% y/y excluding food & energy. Recall that the headline rate is still flattered by the removal of the carbon tax earlier this year, which carved a bit more than half a point from the total.

An unnerving upswing in producer prices, and notably for food manufacturers, has prompted us to upgrade our call on inflation in 2026 to around 2.5% (from closer to 2% previously). A renewed softening in the Canadian dollar is not helping matters, with the loonie retreating 0.7% this week to 70.8 cents (or just below $1.41), alongside a wider rebound in the U.S. dollar. True, calmer energy prices are helping, with WTI sliding further this week to below $58/barrel. But food has more than five times the weight of gasoline prices in the CPI basket, and groceries are now seemingly dominant in consumer inflation expectations.

On the growth front, there is no clear direction for the Bank of Canada, or at least not enough of a guide to counter the sticky inflation picture. After bravely keeping the economy afloat through the intense trade uncertainty, consumer spending seems to be taking a breather. Retail sales fell 0.8% in volume terms in September, nearly reversing a bounce in the prior month. The see-saw pattern in sales may have been snapped last month, as the preliminary estimate points to a flat result. We’ll get a much clearer picture on growth with the release of Q3 GDP next Friday—we suspect the economy just managed to eke out 0.5% growth last quarter, and have pencilled in a moderate 1.5% pace for Q4.

Even amid that sluggish growth backdrop, there are signs that the mood among consumers and businesses is lifting from the darkness earlier this year. For example, the CFIB reports that the index on the 12-month outlook hit its best level of the year in November at 55.5, a reading that is almost back to average over the past decade. That helps somewhat close the curiously wide gap between extremely weak business sentiment on the one side, and record equity prices on the other side. Of course, unfortunately some of the narrowing has been driven by a moderate retreat in stocks, with even the previously world-leading TSX succumbing to gravity, pulling back roughly 3% from last week’s record high.

Albert Einstein’s General Theory of Relativity was published 110 years ago this month, about 10 years after the Special Theory. Armed with just one year of university physics, this space will not even pretend to be an expert on the subject. But a key takeaway from the Theory is that the laws of physics are the same for all non-accelerating objects, and that the speed of light is constant for all observers. In our space-time continuum (i.e., today’s financial markets), that could imply that even sectors growing at the speed of light can’t bend valuations far beyond long-term norms.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.