‘A clear overreaction’: BMO’s top strategist says investors shouldn’t fear Trump’s tariffs — and shares the best opportunities in North American markets

Donald and Melania Trump with Justin and Sophie Gregoire Trudeau in October 2017.

Investors have been on edge as President Donald Trump’s on-again, off-again tariff policies have seesawed markets and potentially raised the risk of a recession.

Shortly after Trump took office, the US imposed import taxes on Canada, Colombia, and Mexico before revoking them almost immediately once those nations agreed to work with Trump on hot-button issues like border security. China also got hit with tariffs and responded in kind.

Stocks seem to have stalled as strategists try to sort out the US’s ever-shifting trade approach.

As markets struggle for direction, BMO Capital Markets is attempting to cut through the noise. The Montreal-based bank focuses much of its research on the US and Canada, making it an authority when speaking on the economic and market impacts of tariffs across those countries.

“The scale of this economic uncertainty is unprecedented,” said Camilla Sutton, BMO’s head of equity research for Canada and the UK, during a February 5 webinar about the impact of tariffs.

It’s almost impossible for American and Canadian companies to plan and issue guidance to investors when they don’t know what next month holds — much less next quarter or next year.

However, top minds at BMO seem confident that Trump’s tariff talk will be more bark than bite.

“We’ve long said that opportunities come about when people — investors and markets — overreact,” said Brian Belski, the firm’s chief investment strategist, on the webinar. “And we believe that there was a clear overreaction to this.”

Stay calm, and play it safe

BMO’s message to clients right now is best summed up by a four-word statement from Belski: “Remain calm and disciplined.”

While neither the S&P 500 nor the Canadian S&P/TSX Composite Index have gone far lately, both indexes have had dizzying intra-day swings.

Despite this volatility, BMO is sticking with year-end targets that imply double-digit gains since it believes both US and Canadian markets are in long-term uptrends. Belski said he’s thought US stocks were set for 25 strong years since arriving at BMO in 2012, and he’s not changing now. He added that Canadian stocks are “coming along for the ride.”

“Within secular bulls, you can have cyclical bears, which we clearly did in the fourth quarter of 2018,” Belski said. “We had a clear bear market during Covid, and another bear market in 2022. So you can have these opportunities, from a fundamental perspective, to be involved.”

With that said, the top strategist said investors should take a granular look at individual stocks, instead of simply buying shares of US-based companies.

“Worry more about the implicit, bottoms-up view on the stocks, versus trying to make the big market call,” Belski said.

Similarly, stock-pickers shouldn’t get greedy or caught up in the hype of a promising company or market-shifting trend. Nor should they make huge bets based on policy views or predictions, especially in this highly uncertain market.

“Now is not the time to be hitting home runs,” Belski said. “Now it’s time to be hitting singles and doubles, and it’s time to be more fundamental. It’s time to turn off the rhetoric. It’s time to kind of take two steps back and look at the mosaic.”

Investors should zero in on four key aspects of companies, Belski said: their valuation, growth, operating performance, and price performance.

Through that lens, Belski’s view is that US stocks are richly valued and have little room for error, though they can justify that premium due to their remarkably consistent earnings growth, plus top-tier marks in free cash flow, return on invested capital, and debt to equity. Canadian stocks don’t get nearly as much attention as their US peers, though they score well there also.

“The equity markets in Canada and the United States — relative to other developed markets in the world — are on much better footing,” Belski said.

With that said, certain sectors look like better bets than others. BMO is especially bullish about four investment ideas, which Belski reiterated in a recent note: consumer discretionary, financials, real estate investment trusts (REITs), and technology.

Consumer discretionary and technology look like solid bets in a continued economic expansion, and the latter has historically done best in up markets, BMO has said. And while financials and real estate have been whipsawed by interest-rate swings, both have rallied substantially lately.