Market Update & Commentary – Summer 2026

Equity Markets

Equity markets rebounded strongly in the second quarter of 2026, with gains broad-based across major regions after a more uneven start to the year. Investor sentiment improved as economic activity and corporate earnings remained resilient, supported in part by continued enthusiasm around technology and artificial intelligence. Canadian equities advanced (+7.0%), while U.S. equities posted a particularly strong gain (+17.1%), recovering from first-quarter weakness as market leadership again became concentrated in a narrow group of large-cap growth and technology-related companies. International equities also performed well (+12.0%), benefiting from improved risk appetite and attractive relative valuations. Despite the strong headline returns, the underlying environment remains more complicated. Inflation has not moved in a straight line, and the outlook for interest rates has become less clear as central banks continue to balance resilient growth against renewed inflation risks and ongoing geopolitical uncertainty.

Canada

Canadian equities posted a strong second quarter, with the S&P/TSX advancing 7.0%. Performance was driven overwhelmingly by Financials, which generated more than the full benchmark return on their own. The sector represents roughly one-third of the index, and Canadian banks rallied more than 30% over the three-month period. While market breadth was still reasonable, with eight of eleven sectors posting gains, the underlying composition of performance was highly concentrated. 

Commodity-oriented sectors, which had been key drivers in the first quarter, gave back some of their earlier gains. Materials declined 12% as gold prices cooled, while Energy fell 5% as oil prices softened and geopolitical risk premiums moderated alongside signs of de-escalation involving Iran. Overall, while headline returns were strong, the quarter was defined by a sharp rotation into banks and away from the commodity leadership that had supported the market earlier in the year.

United States

The same macro backdrop applied to US equities, but in their case, the quarter was ultimately all about semiconductors, which surged more than 50%.  This contributed over half of the index’s return. Overall, the S&P 500 finished the quarter up 15.2% in USD and 17.1% in Canadian dollars, as the US dollar strengthened during the period. Sector performance reflected that dynamic. Technology (+32%) was the only sector to outperform the index. At the other end of the spectrum, Energy quickly gave back some of its gains and more defensive sectors such as Utilities (-1%) and Consumer Staples (0%) were also notable laggards.

International

International equities were in a similar position, dependent on semiconductors.  The group surged almost 100% and contributed about 40% of the index’s return. Overall, international equities finished the quarter up 12.0% in CAD. Currency movements had a small positive impact during the quarter. Sector performance reflected that dynamic. Technology (+57%) was by far the leading sector. Financials (+16) also continued to perform very well as Banks’ momentum continued. At the other end of the spectrum, Energy (-16%) and defensive sectors such as Communication (0%), Utilities (3%), Health Care (4%), and Consumer Staples (7%) all materially underperformed.  

Market Concentration

Beyond the headline performance, market concentration remains an important consideration. A narrow group of companies and themes has driven a meaningful portion of recent returns, particularly those tied to artificial intelligence. While we believe AI will create real long-term value, we do not believe the opportunity is limited to the companies that have benefited most so far, nor do we believe it is prudent to overpay for what is currently most popular.

In both the U.S. and Canada, broad market indices have become more concentrated and, in some areas, more expensive than they may appear on the surface. As a result, our portfolios are positioned differently from the benchmarks. This has weighed on relative performance recently but reflects a deliberate choice to emphasize high-quality businesses with durable cash flows, strong balance sheets, and attractive long-term return potential, while maintaining discipline around valuation.

We continue to own businesses we believe are well positioned to benefit from long-term trends, including technology and AI, but we remain selective. Periods of narrow market leadership can be frustrating, but they also reinforce the importance of discipline. Markets eventually refocus on fundamentals, including business quality, valuation, balance sheet strength, and durability. When that happens, we believe portfolios remain well positioned to protect and grow capital over time.

Fixed Income Markets

The Canadian bond market was remarkably resilient, delivering strong returns over the quarter. While fixed income markets remained volatile throughout the period, bonds benefited in late June from the US-Iran agreement to open the Strait of Hormuz, which allowed the resumption of oil flows from key points. The Canadian bond market was stable relative to the US Treasury market, driven by strengthening economic data and moderating inflation readings. The market closed the quarter with lower yields as the likelihood of a peace deal increased and inflation expectations remained well-anchored.

The Canadian corporate bond market experienced record issuance this quarter, as domestic and foreign (Maple) supply totaled over C$52 billion, doubling last year’s volume. Notably, there were record-sized corporate issues by the US technology sector, including C$8.5 billion by Alphabet and C$14 billion by Amazon. Despite the increase in supply, corporate credit spreads tightened, closing the quarter near the record-tight levels seen in January.

Diverging Paths for Canadian and US Markets

In addition to geopolitical uncertainty, the market volatility from the US Treasury market intensified as the first Federal Reserve meeting under the new Chairman, Kevin Warsh, was unexpectedly hawkish. The June meeting took the bond market by surprise as the FOMC increased projections for inflation above target levels to 3.3% (Core PCE). As a result, the US Treasury market moved from pricing in rate cuts to pricing in at least one full rate hike by the end of this year. This caused the 2-to-7-year portion of the US Treasury yield curve to rise by almost 40 basis points over the quarter.

In Canada, economic data strengthened as expansionary fiscal programs and spending on large infrastructure projects started to kick in. These large-scale policy initiatives helped offset uncertainty surrounding the CUSMA renegotiation and its investment overhang, which had weighed on growth in prior quarters. In April, Canadian growth rebounded dramatically to 0.5%, with Q2 growth now projected to come in at 2% (annualized), compared to negligible growth in Q1. Economic fundamentals in Canada strengthened as economic growth improved, while the April trade surplus rose to $2.72 billion. Labour market conditions also improved, with the unemployment rate declining to 6.6% in May. While the monthly wage increase of 3.2% remains sticky, it is slowly approaching pre-COVID levels, indicating a more balanced labour market.

Central Banks Remain on Hold as Inflation Stabilizes

Despite the scale of the disruption to the global energy supply due to the closure of the Strait of Hormuz, oil prices were notably stable within a defined trading range and ultimately declined to pre-war levels. US diplomatic efforts, intermittent carrier flows through the strait, and one-off supply arrangements kept oil prices relatively stable despite the scale of the disruption.

In May, headline inflation in Canada increased moderately to 3.2% Y/Y from 2.8% Y/Y, while the Core Median CPI rate held stable at 2.1% Y/Y. In comparison, the US PCE rate increased to 4.1% Y/Y from 3.8% Y/Y, while the core PCE rate increased to 3.4% Y/Y from 3.3% Y/Y. Given the limited flow-through from elevated oil prices into core metrics, central bankers remained on hold, viewing the energy disruption as a transient supply shock that affords them time to “wait and see.”

The Bank of Canada maintained its policy rate of 2.25% through the quarter, with the market pricing in a little less than one 25-basis-point rate hike in December. The US Federal Reserve also maintained its policy rate during the quarter at 3.50%–3.75% as the market moved to pricing in a rate hike following the June meeting, where the committee increased the Core PCE inflation projections to 3.3% by the end of the year. Data releases have not yet indicated a dramatic increase in inflation and stand to benefit from higher energy prices, although this is partly offset by weaker global growth prospects.

Labour market conditions remained stable, with unemployment holding at 6.7%, while wage growth showed signs of re-acceleration. Canadian bond yields ended the quarter at lower yield levels across the curve. Two-year Government of Canada bond yields declined 8 basis points to 2.74%, while five-year yields also declined by a similar 8 basis points to close at 3.01%. Longer-term yields outperformed as duration buyers stepped in to lock in higher yields, with 10-year yields declining 9 basis points to 3.47% and 30-year yields dropping 11.5 basis points to 3.78%. In comparison, the US Treasury market remained relatively more volatile, with yields closing higher at the end of the quarter. The biggest moves were in two-year and five-year rates, with two-year rates increasing by 38 basis points to 4.18% and five-year rates increasing 28 basis points to 4.23%.