Market Update & Commentary – Fall 2026

01 Equity Markets

Equity markets continued to advance in the third quarter of 2026, although gains were more modest than the strong rebound recorded in the second quarter. All main equity markets generated low single digit returns, but leadership remained narrow and shifted during the quarter. Resource sectors contributed positively, while Technology remained strong in North American markets, with software companies leading the sector rather than semiconductor stocks.  The positive headline returns masked a more uneven environment beneath the surface, with gains concentrated in select areas of the market. Shifting leadership reflects the uncertainty investors face as they assess the strength of the job market, the persistence of inflation and the future path of interest rates. Perhaps more importantly, debate continues over the scale and ultimate returns of investment in artificial intelligence, and how the technology will reshape everyday life and industries across the economy.

Market	Return
Canada	+1.6%
United States	+2.4%
International	+1.0%

Benchmark performance as at September 30th 2026. Canada; S&P/TSX Composite Index // United States; S&P 500 Index (CAD) // International; International Equity Benchmark (CAD)

Canadian equities

They posted a modest gain in the third quarter, with the S&P/TSX advancing 1.6%. Leadership shifted from the strong bank rally of the second quarter to Materials (+13%) and Technology (+18%), which clearly led the market. Despite the positive benchmark return, only three of eleven sectors recorded gains, highlighting how narrowly concentrated the advance remained.  The rebound in Materials marked a reversal from the previous quarter’s weakness, while strength in Technology was led by software companies. Overall, the quarter illustrated how a positive index return can mask weakness across much of the market, with leadership changing but remaining concentrated in a small number of sectors.

US equities

They continued their upward trajectory in Q3, but at a more modest pace following a strong first half. Two notable trends shaped performance this quarter: the rise of open-weight AI models and higher interest rates.  In our view, the rise of open-weight models eased concerns that AI’s economic benefits would be dominated by one or two “digital gods”, supporting expectations of a broader distribution of value and a significant recovery in software and service providers whose businesses rely on knowledge work.  Overall, US equities gained 2.4% in CAD. Sector performance reflected these two key themes. Technology (+7%) was among the strongest performers, led by software and IT services. Health Care (+6%) also performed strongly, recovering after investors had previously used the sector as a source of funds to buy AI-related stocks.  At the other end of the spectrum, rising yields pressured sectors typically viewed as bond proxies, including Utilities (-12%), Real Estate (-6%) and Consumer Staples (-2%). More cyclical sectors also weakened, including Industrials (-10%) and Consumer Discretionary (-5%). Finally, Energy (+17%) rebounded strongly as the ongoing war in the Middle East put upward pressure on oil prices.

International equities

These were driven by the same two trends.  Aside from the rise of open-weight models, they were also affected by persistent inflation, heavy government borrowing and growing financing needs for AI infrastructure that continued to put upward pressure on bond yields. Overall, international equities gained 1.0% during the period, with a modest weakening of the loonie providing a small boost to returns. Technology (-8%) was the weakest-performing sector, reflecting its significant exposure to semiconductor equipment and memory-related companies, which took a breather following exceptional first-half returns. While software and service providers posted double-digit gains, their smaller weight in the sector was insufficient to offset semiconductor weakness. Despite rising yields, Communication Services (+7%) performed well, with telecom stocks recovering as concerns about disruption from SpaceX’s satellite services eased. SoftBank Group also contributed strongly. Financials (+6%) continued to perform well as a steepening yield curve supported margins, while robust capital markets activity underpinned profit growth. Energy (+17%) equities also performed strongly in international markets.

Following strong returns from AI-related companies in the first half of the year, the third quarter brought some normalization in market leadership. Nevertheless, benchmark concentration remains high, leaving investors heavily exposed to a relatively narrow group of companies and themes. While we believe AI will create meaningful long-term value, uncertainty remains around where that value will accrue and how much is already reflected in share prices. Our portfolios therefore continue to be positioned quite differently from the benchmarks, reflecting a deliberate emphasis on high-quality businesses with durable cash flows, strong balance sheets and attractive valuations. We remain selective in our exposure to technology and AI, while pursuing opportunities across a broader range of industries. This positioning can weigh on relative performance when market gains are narrowly concentrated, but we believe it provides a sound foundation for protecting and growing capital over time.

02 Fixed Income Markets

Equity markets continued to advance in the third quarter of 2026, although gains were more modest than the strong rebound recorded in the second quarter. All main equity markets generated low single digit returns, but leadership remained narrow and shifted during the quarter. Resource sectors contributed positively, while Technology remained strong in North American markets, with software companies leading the sector rather than semiconductor stocks.  The positive headline returns masked a more uneven environment beneath the surface, with gains concentrated in select areas of the market. Shifting leadership reflects the uncertainty investors face as they assess the strength of the job market, the persistence of inflation and the future path of interest rates. Perhaps more importantly, debate continues over the scale and ultimate returns of investment in artificial intelligence, and how the technology will reshape everyday life and industries across the economy.

Economic Growth

Amidst this backdrop, economic growth remained resilient. Canada beat expectations by reporting second-quarter annualized growth of 3.3%, with indications that real GDP growth will come in at 1.5% in 2026 and 2% in 2027. While tariffs remain an overhang to the outlook in Canada, recent Government infrastructure projects and fiscal spending initiatives have tempered the negative impacts. Strong growth in both Canada and the US gives central bankers the added capacity to hike rates to help stabilize rising inflation expectations.

Supply Pressure

The bond market has also experienced upward pressure on rates due to supply and demand imbalances, such as increased Government issuance combined with record corporate bond issuance from the AI buildout. We think that the most prominent risk in the near term is in the long end of the curve due to increasing demand/supply imbalances and hedge fund speculation (short positions). Rising Government debt levels and increased bond issuance by Governments and the corporate sector (led by the tech sector) have put upward pressure on interest rates. In addition, as global rates rise, foreign selling of bonds in the US and Canada has accelerated due to more attractive yields in their domestic markets.

Rate Risk

The risks in the front end of the yield curve are notably lower compared to the last hiking cycle in 2022/23; due to the higher yield base we are starting from. For example, the five-year yield is more than double, or 210 basis points higher in yield, than when the Bank of Canada started to hike rates in February of 2022. Short bonds with a term to maturity of one to five years have a yield to maturity that is now greater than the measure of interest rate risk (duration), which means that a negative impact to the total return of these bonds will be quickly mitigated by an offset from higher bond income. For example, an additional 100 basis point increase in yields in this short 1–5-year segment of the curve is now at a point where it will be recovered through higher yield income in less than twelve months.

Yield Moves

Canadian bond yields followed the trend in global rates higher this quarter. Short-term yields rose, led by monetary policy tightening expectations, while long-term bonds rose as supply and demand imbalances magnified the move to higher yields. Over the quarter, two-year Government of Canada bond yields increased 62 basis points to 3.37%, while five-year yields led the move higher, rising 69 basis points to close at 3.71%. Long-term yields also moved higher over the quarter, as ten-year yields increased 62 basis points to 3.99% and thirty-year yields increased 52 basis points to 4.30%. In comparison, the US Treasury market experienced more magnified moves higher, led by longer-term bonds. Specifically, ten-year US Treasury yields increased 82 basis points to 5.29%, while thirty-year US Treasury yields increased 68 basis points to 5.63%.