"Tough to be anything but bullish": Why the bears keep getting it wrong

War in the Middle East. Sticky inflation. Rising bond yields. Record government deficits.

On paper, investors have had plenty of reasons to worry about the economy over the past two years. Yet markets continue to climb, AI stocks continue to surge, and every correction seems to get bought.

According to BMO Global Asset Management Multi Asset Strategy Director, Fred Demers, investors may be underestimating a powerful force that's quietly reshaping markets: policymakers have become increasingly unwilling to tolerate deep recessions and major job losses.

That doesn't mean downturns are impossible. But it does help explain why so many widely anticipated recessions have failed to materialise.

And it's one of the reasons Demers remains constructive on equities despite a backdrop that many investors still view as fragile.

Why every downturn gets a policy response

Demers believes governments and central banks learned important lessons from both the Great Depression and the Global Financial Crisis.

In both cases, labour markets took years to recover. And that's something policymakers are increasingly determined to avoid.

“It's easy to slow down inflation. But it's hard to create jobs,” he said.

That mindset, he argues, helps explain the aggressive policy responses and money printing investors have witnessed over the past decade.

Whether it was pandemic-era stimulus, support for vulnerable industries, or increasingly large fiscal deficits, governments have repeatedly stepped in whenever downside risks threatened economic growth.

As a result, markets have spent years bracing for recessions that never fully arrived.

“The policy response is making sure that any adverse shocks that's coming to the market, to the economy, is getting a strong response. They want to avoid the downside ... we haven't had a genuine recession outside of the COVID shock [in recent history]," Demers said.

That doesn't mean markets are risk-free. But it does suggest investors should think carefully before betting on an economic collapse.

"This is why it's so tough to be anything but bullish in this market, because of the policy responses - look at the size of the deficits."

Rates are... overrated

Demers' optimism isn't solely based on government support.

He also believes many investors continue to overstate the relationship between interest rates and growth stocks.

Conventional wisdom suggests higher bond yields should be a headwind for technology companies. Yet AI-related stocks, particularly semiconductors and infrastructure providers, continue to perform strongly despite elevated rates.

“In general, I tend to think investors pay too much attention to the relationship between rates and growth stocks,” he said.

Instead, Demers points to a powerful AI-driven investment boom that is still gathering momentum.

“The capex cycle is extremely bullish," he said, adding that AI investment and S&P 500 earnings are moving upwards in tandem.

He argues the enormous spending on data centres, chips and AI infrastructure is creating a tailwind for earnings that is far more important than short-term fluctuations in bond yields.

“The big picture remains extremely bullish.”

Don't confuse a hedge with a growth opportunity

One of Demers' most contrarian calls is on oil.

"I think the rally is done," he said.

While many analysts believe the Middle East conflict has raised the long-term floor for crude prices, Demers believes the opposite. He argues the U.S. has transformed itself into an energy superpower and that policymakers ultimately want more supply, not less.

“I wouldn't be surprised two years from now we're looking at US$50 to US$60 oil again,” he said.

“I think Trump understands the positiveness of cheap energy. Natural gas prices are very important for industrial production in the US, for data centres.”

If he's right, investors chasing energy stocks after their recent rally may be arriving late to the party.

Fixed income may stay challenging

While many investors continue waiting for aggressive rate cuts, Demers is less convinced they are coming anytime soon.

His reasoning is simple: the economy remains stronger than many expected.

“That resilience in the economy is making it difficult to get rates down," he said.

Australia is a particularly interesting situation from a monetary policy standpoint. Demers notes that inflation has remained more persistent than many policymakers hoped, creating the possibility that rates stay higher for longer than investors currently expect.

For fixed-income investors, he still sees value in credit markets, particularly if economic growth remains resilient.

“Credit is still attractive. If you don't worry about rate hikes from the Fed, if you think there will be a long pause, then credit makes sense,” he said.

However, Demers cautions investors against taking excessive duration risk, arguing that inflation remains the key threat to fixed-income markets.

Gold's role is changing

Demers is also constructive on gold, though perhaps not for the reasons many investors assume.

Rather than viewing it solely as a geopolitical hedge, he sees gold as an increasingly important diversifier alongside traditional fixed income.

“The key diversification benefit of gold is really trying to compensate for the weaker part of a 60/40 portfolio, which is fixed income,” he said.

With inflation risks still lingering and bonds no longer providing the same diversification benefits they once did, Demers believes gold continues to have a role in portfolios.

He prefers exposure to the physical asset rather than gold miners, which can introduce significantly more volatility.

The real reason markets keep bouncing back

Many commentators have argued that ETFs and passive investing are changing market behaviour by creating a constant flow of buyers.

Demers sees it differently.

“The money is coming from people getting a paycheck and being willing to invest,” he said.

As long as employment remains strong, retirement contributions and regular investment flows continue entering markets. 

That, combined with the ease of buying ETFs, has transformed retail investors into the new "whales" of capital markets, giving them the ability to buy the dip at scale and help drive market recoveries.

Hence why he believes labour markets remain one of the most important indicators for investors to watch.

A genuine recession would still hurt equities. But until unemployment rises meaningfully, Demers sees little evidence that the broader bull market is about to break.