2025 was a year in which market outcomes were largely dictated by tariffs shocks, AI narrative, commodity price movements, sector rotations, short-term fear and euphoria, and investor positioning rather than by true incremental changes in underlying business value. In our opinion, this divergence between price action and intrinsic value was especially pronounced in Canada, where headline index returns were largely driven largely by gold equities and large-cap banks.
We have heard from several independent sources across the investment landscape that 2025 was among the most difficult years to outperform the benchmark, for investors committed to investing in high-quality businesses at attractive valuation levels. Based on market quotations for many businesses we know well, we believe this assessment is quite accurate. In numerous cases, share prices declined materially despite stable or improving fundamentals, strong cash flow generation, disciplined capital allocation, and intact long-term growth trajectories. In other words, 2025 was a year in which price and value often moved in opposite directions and fund flows towards “exciting” parts of the market made those investments supposed obvious choice for incremental capital allocations. Some of those “exciting” themes or favored securities corrected a lot once they were no longer qualified for incremental fund flows, while others are still staying strong despite often irrational (in our opinion) valuation levels.
From a market-structure perspective, three defining characteristics shaped the year. First, equity market leadership was quite narrow, with a large portion of indices returns concentrated in a small subset of sectors. In Canada, gold equities and banks dominated index performance.
Second, dispersion within equities themselves remained exceptionally high. The spread between winners and losers widened a lot, both across sectors and within industries. This environment is often cited as favorable for active management, which we believe is true, if investors can stay true to their knitting and not let market quotations direct their thinking.
Third, and most importantly for our investors, the second half of 2025 was characterized by a sharp selloff for long-duration compounders, especially those operating within vertical market software businesses. This rotation was abrupt, and, in our view, contrary to changes in business fundamentals. Instead, it reflected market fear of unknown and served as another validation of a compression of investor time horizons (akin to scrolling social media news headlines, rather than taking a time to read a well thought out news article).
Altogether, 2025 was a year in which market prices often reflected evolving geopolitical views/fears, changing market composition, fund flow dynamics and other outside forces rather than economic reality at the companies’ level. While such periods often lead to exceptional dispersions in the short term, they are neither unusual nor avoidable.
