Highlights
Despite the magnitude of challenges investors faced during the first half of the year, the picture for 2026 remains overwhelmingly positive. Clearly, equity markets were right to gradually price in a deescalation scenario in the Strait of Hormuz. So, what should investors be watching for now?
After reaching its highest level in three years, inflation is now expected by markets to slow markedly over the coming year. If the decline in energy prices is sustained, tariffs remain broadly stable — or even ease — and labour market conditions remain balanced, there are grounds to be reasonably optimistic.
Of course, moderate rate hikes by the Federal Reserve would also help contain inflation. However, while this is currently the market's expectation, it should not be taken as a foregone conclusion.
That said, the key question for markets is becoming less purely economic and increasingly thematic, particularly in the context of AI investments. So, where are we in the technology cycle? Based on productivity data and activity in the initial public offering (IPO) market, it still seems too early to blow the final whistle.
Against this backdrop, we increased our equity allocation for a third consecutive month at the end of June. Within equities, we took partial profits in Emerging Markets and reallocated them to EAFE equities to better manage concentration risk. Finally, we take a closer look at the remarkable outperformance of Canada's banking sector which, despite its unmatched long-term track record, may have run a little too far in the short term.
Bottom Line
Easing tensions in global energy markets have improved the outlook for the second half of the year. Overall, the macroeconomic backdrop continues to favour Equities over Fixed Income, while calling for heightened vigilance with respect to inflation, the Federal Reserve and, above all, capital investments in artificial intelligence.