Global equities extended their winning streak in Q4, albeit with heightened volatility and more subdued returns compared to the robust gains seen during the summer months. Canadian equities outperformed once again, supported by strong performances from banks and gold miners. On the other hand, U.S. equity gains were more restrained as enthusiasm surrounding artificial intelligence cooled, with investors rotating toward more attractively valued laggards, notably in the Healthcare sector. In fixed income, the Canadian bond universe ended the quarter with slight losses, as yields climbed following a series of stronger-than-expected jobs data.
Turning to the macro backdrop, the current environment has become particularly challenging to navigate for U.S. policymakers. While inflation remains stubbornly above target because of tariffs, the labour market has weakened noticeably; job creation has slowed to a crawl, and the unemployment rate sits at its highest level since 2021. Complicating matters even further, the employment landscape is also shaped by structural forces such as tighter immigration policies, which constrain labour supply, and the growing adoption of artificial intelligence, which may already be dampening demand for workers.
Under these conditions, both North American central banks elected to proactively cut their benchmark rates, and the Federal Reserve is expected to further cut rates twice in 2026, gradually moving its policy stance to neutral. On the fiscal side, the positive impact of the One Big Beautiful Bill should start being felt more meaningfully at the start of the year through lower household tax burdens and incentives for added business investment.
Looking ahead, our base case scenario calls for continued economic growth in 2026, benefiting from both monetary easing and fiscal stimulus. However, risks remain two-sided. On the downside, a further deterioration of the labour market would prove problematic, particularly if the current “low hiring, low firing” dynamic shifts toward more meaningful layoffs. On the upside, stronger-than-expected productivity gains from AI-driven investment could bolster economic growth while also keeping inflationary pressures in check. However, with so much stimulus in the pipeline, any disappointment on the productivity front might reignite concerns about economic overheating. In any case, political uncertainty – driven by upcoming midterm elections in the U.S. and a leadership change at the Federal Reserve – should keep market volatility at a relatively elevated level throughout the year, much as it was during the final quarter of 2025.
Against this backdrop, we maintained our moderate risk-on stance through an overweight in equities relative to fixed income. Within equities, we decreased our allocation to the EAFE region and increased our allocation to the United States, the latter benefitting from a stronger track record and a more favourable outlook when it comes to earnings growth, which is going to be key next year. Finally, we remain overweight Canadian and Emerging Markets equities, reflecting strong relative momentum, positive earnings prospects, and sector compositions that are well-aligned with the current environment