Martin Lefebvre
Hi everyone, welcome and thank you for tuning into our NBI podcast. I'm Martin Lefebvre, CIO at National Bank Investments. As the year comes to an end, today's focus will be on the 2026 outlook and more specifically on what to watch in Canada and the U.S. To do so, I'm joined by a longtime friend and contributor to NBI, Jack Manley, Global Market Strategist at JP Morgan Asset Management. Jack, thank you for being with us.
Jack Manley
It’s great to be here, Martin. Thank you for the invitation.
Martin Lefebvre
We're going to talk at length of the usual topics when you talk about the macro landscape, obviously the political environment, the labour market, inflation, central banks, and what you think will assume the next leadership next year. Why don't we start with the environment? There was a released fiscal plan by Canada not so long ago and obviously the One Big Beautiful Bill earlier in the U.S. What do you make of that?
Jack Manley
I think the easiest way to think of fiscal stimulus, whether it's coming out of Canada or coming out of the States, is that it is a probably a net positive from a consumption perspective. But there's a lot of room to debate as to how positive it's actually going to be. When I think about the One Big Beautiful Bill, when I think about the new federal budget for 2026 in Canada, and that the big things that I think are easy to hone in on are changes to the tax code, whether that is adjustments to rates like what you saw out of U.S. fiscal stimulus or adjustments to depreciation schedules like what you saw out of the federal budget. These things are in theory making these countries more attractive destinations for capital and in theory by extension, giving their consumers a bit of a lifeline.
When I think about the outlook for 2026, whether you're looking at Canada or at the U.S., fiscal stimulus is one of those things that I think will be helpful. And to me, Martin, the bigger question is: is that fiscal stimulus enough to overcome all the other hurdles, all the other issues that the consumer is facing. And I think in that case, it's going to depend a whole lot on if you're talking about Canada or you're talking about the States. And we can talk about this certainly, but the CliffsNotes on my end are recession risk in the U.S. was a lot bigger or greater at the start of the year. It has essentially been neutralized. I don't think anybody's really talking about a U.S. recession over the next 12 months. Canada is unfortunately not out of the woods. And that is even with this new federal budget that the quote unquote “generational investment” that we're seeing the Carney administration made.
Martin Lefebvre
Why do you think that? Is it like too late, too little too late or?
Jack Manley
It's probably a little bit too late. On the tax side of things, you can make spending more attractive for corporations in Canada, but you probably have to make some adjustments to the regulatory environment too, in order to truly draw in that foreign capital that you're looking for. But even beyond that, I mean, the issues that the Canadian economy are facing are, I think, pretty pronounced ones. Canada is very clearly in the crosshairs when it comes to the trade war and the barrage of tariffs that are coming out of Washington. Canada is particularly sensitive to changes in trade policy. And while it looks better now than it did, say, back in April, it's still not ideal. We also know, and I always think this is very interesting when you compare these two countries, that our consumers have dealt with or absorbed higher interest rates in very different ways. We know that in both countries, mortgage debt, for example, is the biggest chunk of all household debt. In the States, if you buy a house, you're buying that house and locking in a mortgage rate for 30 years. This just doesn't happen in Canada. You have a lot of homeowners in the U.S. that are paying 2.5%, 2.75 % loans, as far as the eye can see, even though the Fed took rates up a whole lot more than where they were just a few years ago. In Canada, anybody that's listening that owns property knows now those higher rates flow through much more quickly. And this might come up later in our in our chat, Martin, but the other thing I think is worth pointing out is what's going on with the labour and the fact that there seems to be you know more structural looseness in the Canadian labour market compared to what you see in the States that's another headwind. Fiscal stimulus is helpful and certainly Canada needed some and we even heard from the likes of Macklem not too long ago that he was kind of thinking of passing the baton from monetary stimulus to fiscal stimulus. Somebody else has got to help him here, but is it enough to overcome those headwinds? That's where I'm a little bit skeptical.
Martin Lefebvre
Talking about the cyclicality of the Canadian economy compared to the U.S. and the impact of tariffs on some sectors, especially the auto sector in Ontario, do you think that the Bank of Canada (BoC) has done enough? Are they done with their monetary easing, or what's your take on that?
Jack Manley
Whenever I have a conversation about the BoC, the first thing I have to do is commend them from the perspective of being an American, looking at how the Federal Reserve has managed monetary policy. I think the BoC has done a very good job of front running a lot of these potential issues of being extremely data dependent, extremely reactive. I think Macklem and his commentary, he gives a lot of forward guidance. It's actually pretty useful. In that sense, I think they've done about all they can. I don't think they could have handled this stuff a whole lot better. Now, in terms of where rates go from here, that to me is still very much up in the air. I see how every week, every month, there is a new bit of data that kind of refines what our view is on the economy. As we get that bit of data, we have to adjust our view on where rates are going to go. I can see this world where the Canadian economy slows down, the labour market slackens up, drifts lower through the end of next year, and the BoC all of sudden feels compelled to cut two or three more times, which would be extraordinary if you consider where they are right now and how much front loading they did. I can also see an environment where they don't cut in December, and maybe we only get one cut next year, maybe not even that if we kind of hold steady where we are right now. I think Macklem and the Bank of Canada are sort of flying by night at this point and they are not really in the position to make long term prognostications about rates. I feel like they're managing rates on a month in, month out, month out basis.
Martin Lefebvre
What about the Fed? They've been navigating a bit in the dark with the shutdown, but now that it's behind us, we had labour statistics that came out last week, maybe a little better than what was expected. Nevertheless, we see that the trend is still slowing down and it seems that on a three-month average or basis, not much job creation in the U.S. What do you make of that? Is there still this war between persistent inflation and a slowing labour market?
Jack Manley
I would say that for the better part of 2025, the Fed has been really paying attention to both sides of its dual mandate for a long time, post-COVID. All they cared about was inflation when inflation was out of control. Once inflation got under control, the Fed sort of had the luxury of being able to look at the rest of its mandate, the other side of its mandate, which would be the labour side of the equation. When I think about monetary policy and the differences between the Fed and the Bank of Canada. The biggest thing to point out here though, with all that in mind, is that nobody thinks that the overnight rate in Canada is restrictive. Nobody is saying that right now. Whereas very clearly the overnight rate in the U.S. is still being billed as in restrictive territory. Powell has said it a number of times across testimonies, press conferences. We see it every time they put out a new summary of economic projections with the corresponding dot plot on a quarterly basis. Powell thinks that rates are still restrictive. And if you think about an economy, to your point, that maybe it's slowing down a little bit, you think about a labour market that maybe is slacking up a little bit, that would suggest that the Fed is very much biased toward cutting. Whereas with the BoC, I think you have this kind of range of potential outcomes where like it could be no cuts, it could be three cuts, it's totally dependent on what tomorrow and next week and next month brings us. With the Fed, it's a little bit more straightforward. I do feel like December is a coin toss given, given, to your point Martin, the government shutdown and the lack of access to data that definitely complicates things over the short term. But our team's view and, frankly, my personal view, is that between now and the end of 2026, you're probably going to see two to three more, more cuts out of out of the Fed. The range, they’re a little bit more narrow in terms of what could potentially happen.
Martin Lefebvre
What does it mean for 2026 in terms of the growth outlook in the U.S.? GDP now is currently somewhere around 4 % for the third quarter. It seems this pace cannot continue at the same rhythm. But still, we got a lot of fiscal spending in the pipeline. We got probably lower rates and that should all be something that will push the U.S. growth further, what's your growth outlook?
Jack Manley
When I look at growth, I see a lot of volatility. And you've already gotten some evidence of that so far this year. I think it's very interesting that first quarter GDP growth was negative and was the first negative GDP print that we've seen in three years. I think it is very interesting that the second quarter GDP print was almost 4%. Twice the long-term average or double the long-term average, about as strong as you've gotten in a couple years. To your point, we don't have third quarter numbers out just yet, but they're trending at pretty close to 4%. But then we expect fourth quarter growth to basically drop down to zero. Then you look into next year and exactly as you said, Martin, a lot of fiscal stimulus hitting the system, something that is very interesting that's worth pointing out here, the fiscal stimulus, the changes to the household tax codes and the corporate tax code that were passed as part of the One Big Beautiful Bill back in July, they are retroactive for the start of 2025. But the IRS, the Internal Revenue Service in the United States has not changed their withholding guidance and won't be doing so until the start of 2026, which means that when Americans start to file their taxes in the first quarter of next year, they're going to be getting rebates for overpayments over the entirety of 2025, as opposed to just the first, let's call it, six months. We're looking for a bumper crop tax, refund season in the first half of 2026 that should bump growth back up to 3% to 4% before things settle back down to earth in the back half probably pretty close to zero. If you think about this overall trajectory, it's negative to very large, to very large to flat, to large to large to flat to negative. It's a lot of this choppiness. There's a lot of this this volatility. And what's interesting is like through all the noise the signal there is going to be growth that's probably pretty close to trend. The U.S. economy will probably grow around 2% annualized over the course of 2025 and 2026, but it is not like a melt higher. It's not like every quarter it's 2% annualized. It's this incredible choppiness. That, I think, is going to hide that underlying story that the economy is actually doing okay, all things considered.
Martin Lefebvre
Growth or spending or CapEx (capital expenditure) by hyperscalers has been very important for GDP growth this year. Some say it represented almost the entirety of growth in the first half of the year, which is not true. I don't know if you looked at that, but I don't think it is. The sector is just basically too small. It went from 5 % to 6 % of GDP. It would have had to be like stellar really to represent 100% of growth. Nevertheless, it's very important. Does U.S. exceptionalism will have to go through that, or is that the end of the road for the U.S.?
Jack Manley
The AI story has been so incredible in terms of its dominance in the equity market. Obviously, the Magnificent Seven doing so much of the heavy lifting. The macro side of things doesn't get discussed as often. And the statistic that I've seen that I think is very compelling is that not that CapEx on AI has been the only driving force behind economic growth over the past couple of quarters, even over the past few years, but that over the past couple of quarters, it is now contributing more to economic growth than the consumer is, than consumption is. It's not to say consumption is contributing at all, very clearly it is, but when you think about how to decompose those growth numbers, CapEx is actually doing a little bit more of the heavy lifting. And that is a really unusual story. This is a consumer-driven, a consumer-led economy. It is unusual for the consumer to take a back seat. Now, you're asking a question here that is the good Julian dollar question that everybody's asking, is this story sustainable? Is it repeatable? And I'll tell you right off the bat, I don't want to go so far as to call myself an AI skeptic, but I am a little bit wary about where we are right now. There's been a ton of spending. Multiples are certainly stretched. Concentration in the index is very intense. I think you've left yourself vulnerable to shocks. And shocks in the economy may mean, you know, growth that should have been 3% is now 1.5% because the bottom on CapEx fell out. Growth in the equity market or shocks in the equity market rather could be very similar to what we've frankly been seeing over these past few weeks, like one or two bad headlines that lead to 5 to 10 % corrections. I think you're going to continue to see shocks like this to the system. But I do not believe we are in a bubble right now. I don't think that's the case. I think it is important to remember that the vast majority of the bulk of the “Magnificent Seven” that are doing so much of the spending here are deeply entrenched companies with long histories that far predate artificial intelligence and large language models sort of entering the zeitgeist, so to speak. Like these companies have been around for decades. They weren't created in somebody's garage a couple of weeks ago. So very different right off the bat from what you would see during like a dot com situation. But the other thing to point out here is that a lot of this CapEx is being financed through cash flow. It's not being financed through leverage. That's changing a little bit on the margin. But if you think about some of the biggest spenders in the space, their balance sheets are extraordinary. And many of them can actually, if they do have to borrow, borrow at a lower rate than the U.S. federal government, which is pretty remarkable. I do think this story can continue. I don't think anybody doubts that AI isn't going to change a lot of things. I think for us, it is much more of a when and not an if. The when has been pushed off a little bit longer than we would have expected. But I continue to believe in a U.S. equity exceptionalism story, maybe not as much of a U.S. economic exceptionalism story, at least over the next couple of years, but on the stock side of things, I do think U.S. assets are the place to be.
Martin Lefebvre
In 2026, you're not in the camp where you take profits on the winners and invest in the laggards. So still large cap in the U.S. over 493 and maybe still cyclicality, EAFE still doing all right. What’s you take on the international landscape?
Jack Manley
My take is that the international or ex-U.S. performance this year, outperformance, frankly, we've seen it in Canada, we've seen it in Europe, we've seen it in Japan, we've seen it in a lot of places, outperformance relative to the U.S. The stuff that's driving this outperformance, it feels in some cases durable, structural, like real adjustments that have permanently rebased earnings potential higher. But I don't think we are on the cusp of some sort of like paradigm shift where the next 10 to 15 years is going to belong to Europe or belong to Japan. When I think about foreign markets or ex-U.S. markets, I think thematically. And when I think about the themes, I'm thinking about things like aerospace and defense companies in Europe that have gotten an incredible boost because the United States is essentially renegotiating NATO treaties with its allies in Europe. They're requiring greater commitments, defense spending. Germany is very notably abandoning its fiscal austerity, spending more money. Do we think that European aerospace and defense companies are going to generate 20% returns for the next 10 to 15 years? Or do we think that what's happened this year has been the result of lot of pent-up demand that got released very quickly through one big policy change in the States? I personally believe more of the former. Developed market banks have done very well this year. That's been an interest rate story. Outside of the U.S. and Canada, in most of the developed world, rates were negative for the better part of the last 15 years. And when that happens, banks don't make money. That's it. Now, rates are positive again. Banks can go back to making money. Even looking at the TSX, so much of the performance here has been driven by the materials sector, which has in turn been driven by gold prices being up 40% year to date. Do we think that's going to happen again next year? I frankly don't. When I think about my global allocation, I acknowledge that some of those changes are sort of structural. They're permanent. They've rebased earnings expectations higher. But that doesn't mean that I want to abandon my overweight to U.S. equities. It just means maybe the overweight's little bit smaller. And then within U.S. equities, I wouldn't go so far as to exclude the S&P 493. I think now is actually an excellent time to embrace the whole 500 name index to really lean on bottoms up security selection, active management. What I'm not calling for though, Martin, is going down in the market cap spectrum. I have a lot of clients that'll ask me like, what do you think about small caps? What do you think about mid caps? That's not where I'm playing right now. When I'm diversifying, I'm diversifying within the S&P 500. I'm not looking at, say, the Russell 2000 to add to my portfolio. That's where I want to be hunting.
Martin Lefebvre
What about your forecast on the U.S. dollar and everything that's linked to Trump's policy to resolve the imbalances in the U.S. on the trade side things. Usually that's a good thing for emerging markets if the U.S. dollar is depreciating. What do you make of that?
Jack Manley
I will tell you his is something of a contrarian take here. think the U.S. dollar is oversold in 2025. My framework for thinking about – this is perhaps overly simplistic –, but it's the way I think about it anyway. If you think about the trade war right now, the reason this trade war feels different than the last trade war – 2017, 2018 – is that from a magnitude perspective, it is significantly larger. The same kind of conversations were being had, the same kind of goals were in place, but the scope of this thing is just so much broader than it was in the past. In the 2017-2018 trade war, the dollar appreciated, not depreciated. The U.S. dollar appreciated because in the 2017-2018 trade war, the market was concerned that tariffs were going to lead to inflation. Inflation would force the Federal Reserve to keep rates where they were or elevate them. And if rates were steady or rising while the rest of the world was still pretty low, then the rate differential gaps out and that's dollar positive. The dollar has depreciated this year because investors, the market was certainly concerned around inflation. They were more concerned about growth. They said: “Okay, this is way more aggressive, way more intense, the scope is so much broader than the last go around. The United States is likely going to entry recession.” And when the recession hits, the Fed cuts, the rate differential narrows, and the dollar becomes less attractive. There's been no recession. If we think about what the outlook is, at least from my perspective, there's no recession for the U.S. on the horizon. And if there's no recession on the horizon, and recession concerns were the reason that the U.S. dollar depreciated as much as they as it did, then almost definitionally, it has to take back some of what it gave up. I don't think the dollar is going back to where it was in 2024. But I think we've seen a bottom on as to how far that can fall. If it had to go anywhere, it's either flat or it's up over the course of 2026.
Martin Lefebvre
Last question, Jack. We had three consecutive years of, let's call it 20% earnings or returns in the stock market globally and specifically in the U.S. Bonds are not doing much. What's your expectations for next year and what would be the positioning?
Jack Manley
I love the ask. And it's funny that you put it where bonds aren't doing much as a bad thing. I think that's actually kind of part of the problem. When it comes to how we think about portfolio construction asset allocation is that we forget that while bonds are useful from an income perspective, certainly – there are other places to get income too –, people like the protection side of fixed income, they like the idea of the 40% in your 60%-40% is going to be the palace, it's going to be the insurance policy. And if it is, if it is indeed an insurance policy for your portfolio, then you should think of it that way. The analogy that I would use when it comes to fixed income in a portfolio, is that owning fixed income - the 40% in the 60%-40% - is like having homeowners’ insurance, where every day that your home does not burn down or get washed away by a flood, you are technically losing money on that policy. But if something terrible does happen to your home, then aren't you grateful that you were paying month in month out that premium. That's how I think about bonds in an environment where the economy is growing, where inflation is reasonably under control, the labour market stays roughly where it is right now, the equity market keeps on trudging higher, you shouldn't expect a whole lot out of out of fixed income because it is your insurance policy. When I think about what's going on in 2026, there is no recession on the horizon from my perspective, the Fed is not going to have to cut a lot more aggressive with what they've telegraphed. I'm not looking for double digit returns that have high quality fixed income next year. I'm looking for basically something close to coupon, which is 3%, 4%, depending on where you're looking. But I would encourage any investor that's thinking about bonds and their role in portfolios right now to remember that fixed income can be that insurance policy, it can be that that Dallas and, admittedly, the macro-outlook is a lot murkier than it was at the start of the year than it was a few years ago. Now is not a bad time to add some protection to portfolios and bonds actually do that very, very well, I would say.
Martin Lefebvre
In terms of tactical asset allocation, what I what I'm hearing from you is that there's it's not an environment where you should change your risk profile, but tactically, would you suggest that equity is still the way to go next year?
Jack Manley
I would say that equities are still the way to go next year, maybe a little bit less than what you would typically hold. Within equities, for me, it's going to be a larger cap U.S. bias. Within fixed income, it's going to be an ultra short to short duration, investment-grade bias. That's the sort of tactical play, I would say in the in 2026.
Martin Lefebvre
All right, Jack, that makes a lot of sense. Thank you very much for being with us today.
Jack Manley
Thanks for having me.
Martin Lefebvre
And for everyone listening, thank you for tuning into this NBI podcast. We'll talk again soon. Thank you.
Martin Lefebvre
