Highlights
Last month, market forces moved back somewhat into balance, as doubts about the financial viability of artificial intelligence led to a rotation within equity markets and eased pressure in bond markets.
Recent market hesitation is fairly typical of the periods leading up to U.S. midterm elections. And, if history is any guide, what follows ahead should be positive for equities, much more so than for the Republican Party, which faces a nearly record-high presidential disapproval rating.
Corporate earnings remain on a strong footing. To be sure, a significant share of S&P 500 earnings growth is attributable to the exceptional contribution of companies tied to the AI boom, whose recent results have often fallen short of ever-rising expectations. Still, a closer look also reveals encouraging results in other sectors.
Unfortunately, the flip side of vigorous economic activity, combined with persistent energy disruptions, is inflation that refuses to slow in the United States. This contrasts sharply with Canada, where the average of core CPI measures has just reached the 2% target for the first time since early 2021.
This backdrop did not prevent the Bank of Canada from following the Fed’s lead by raising its policy rate for the first time since 2023. Markets are also pricing in about three rate hikes by each central bank over the next year. Whether that comes to pass remains to be seen, but there are reasons to be somewhat skeptical.
Bottom Line
On the eve of the U.S. midterm elections, an important page in the Trump administration’s second term seems poised to turn. On the economic front, however, the story should not change suddenly as long as the AI investment cycle—the dominant gravitational force in financial markets—remains in motion. In these circumstances, we are maintaining our positioning, which we will explore in greater detail in our 2027 Outlook, to be published next month.