As Canadians continue to pile cash into exchange-traded funds (ETFs), BMO’s head of ETFs says investors shouldn’t expect the same high stock market returns seen in recent years and should brace for potential volatility in 2025.

“We're probably not going to get the same degree of double-digit gains that we had over the last couple of years,” BMO managing director and head of ETF and structured solution strategy Bipan Rai said in an interview with Yahoo Finance Canada.

“In fact, we might be in an environment where we see single-digit gains and a lot more chop. So the path towards December certainly won't be a smooth ride, and we think it is going to feel a lot more uncertain, and it's something that investors will have to think about.”

Equities posted strong gains last year, particularly in the United States, where the S&P 500 broke 50 record highs throughout 2024 and closed out the year up approximately 23 per cent, following 2023’s gain of 26 per cent. The TSX also closed 2024 up 19 per cent. This came as Canadians continued to pile cash into ETFs, with BMO reporting that total assets under management in ETFs as of November amounted to around $565 billion. That’s up significantly from $380 billion in 2023.

But Rai says the odds of seeing these kinds of double-digit gains for the third year in a row “feel much more of a taller task.” That’s due to several factors, including “very optimistic” estimates for earnings, and forward price-to-earnings ratios that are on par with figures seen in the late 1990s and early 2000s.

“That makes us a bit queasy about potentially betting big on the S&P 500 for the coming year," Rai said.

"It’s really a valuation argument."

The Trump administration may also bring some volatility into the market. While some of President Donald Trump’s policies have been viewed as favourable to capital markets, the threat of widespread tariffs has the potential to be “very disruptive”, Rai says. He also notes that the backdrop for the current Trump administration has changed from what it was during his first term in office, with fiscal policy in particular in a worse position.

“Unlike the backdrop in 2017, given where the starting point is for interest rates, we do think that there is a clear path to potential volatility here relative to where we were during Trump’s first term,” Rai said.

“If you are going to extend those (corporate) tax cuts, you have to have a credible plan for financing the deficit. And if you're relying strictly on tariffs, I think the market is going to take a somewhat circumspect view of that. There’s no literature out there that really supports the idea that tariffs can fill or plug the revenue gap from tax cuts.”