Equity Markets

Equity markets closed out 2025 on a strong footing, with that momentum carrying into early 2026, although performance has been more varied across regions. Investor sentiment has become more measured in recent months, as resilient growth and earnings are increasingly offset by renewed uncertainty around inflation and geopolitical developments. Central banks remain data-dependent, and the path for policy has become less clear, contributing to a mixed market environment. In the first quarter, Canadian equities advanced (+3.9%), supported in part by strength in resources given the elevated geopolitical uncertainty. International equities posted modest gains (+0.7%), while U.S. equities declined (-4.3% in CAD terms), reflecting weakness in technology and shifting leadership.

Canadian equities continued to lead their global peers during the quarter, with the S&P/TSX advancing 3.9% to begin the year. Performance was driven by strength in commodity-oriented sectors, particularly energy and precious metals. Energy (+30%) was the clear standout, benefiting from higher oil prices amid supply concerns tied to the conflict involving Iran. Materials (+11%) and Utilities (+11%) also contributed positively. Given their combined weight of over one-third of the benchmark, Energy and Materials were the primary drivers of index-level returns. That said, underlying market participation was limited, with only five of eleven sectors posting gains. Technology (-23%) was the most notable laggard, as investor sentiment shifted meaningfully on concerns around the potential disruptive impact of artificial intelligence on business models.

U.S. equities had a difficult first quarter of 2026, giving back some of the strong gains made in 2025. Markets became more challenging as investors faced renewed tariff uncertainty following the Supreme Court’s ruling against the administration, along with armed conflict in the Middle East that disrupted energy supply. At the same time, market leadership shifted meaningfully. Advances in AI, particularly in coding, raised concerns about disruption for capital-light technology businesses. U.S. software stocks fell more than 20%, while mega-cap tech also came under pressure as investors questioned business models and their aggressive capital spending plans. The main beneficiaries were generally more capital-intensive businesses, which are viewed as insulated from disruption driven by technological progress. Overall, U.S. equities pulled back from their highs, finishing the quarter down 4.3% in USD. However, the U.S. dollar strengthened against the Canadian dollar, resulting in a smaller decline of 2.6% in USD. Energy (+38%) was the clear standout, while Communication Services (-7%), Information Technology (-9%) and Consumer Discretionary (-9%) lagged in part due to concerns about the rising cost of data center investments.

International equities exhibited greater volatility this quarter, generating a return of 0.7% in Canadian dollars. This was a middle of the pack performance, influenced by the same factors affecting global risk assets. Sector performance reflected these trends. Energy (+43%) was the star across regions, while Materials (+9%) gained from broader commodity strength. Utilities (+13%) also performed well, reflecting their defensive characteristics in a more volatile macroeconomic environment, while also being viewed as an “AI winner” given the need for greater power demand. Consumer Discretionary (-13%) was the main laggard, reflecting concerns about weaker consumer spending following the surge in energy prices.

Beyond regional performance, the macro backdrop has become increasingly complex. Geopolitical tensions, including conflict involving Iran, have contributed to pressure on commodity supply and introduced renewed uncertainty around the inflation outlook, presenting central banks with additional challenges. Despite these headwinds, economic activity has remained resilient, supported in part by continued investment in technology and artificial intelligence, which contributes to productivity and earnings growth. This combination of resilient growth and heightened uncertainty has made the current environment more difficult to navigate. Looking ahead, the effects of prior policy easing are still working their way through the economy, and the outlook remains characterized by competing crosscurrents. Valuations remain elevated in certain segments, and dispersion across sectors and regions continues to widen, reinforcing the importance of selectivity and disciplined risk management. In this environment, it remains difficult to justify large shifts in asset allocation, and portfolios continue to be positioned with a balanced to moderately defensive bias, emphasizing companies with durable cash flows, strong balance sheets, and attractive risk-adjusted valuations. While periods of volatility are likely as markets respond to evolving economic and geopolitical developments, central banks retain flexibility to adjust policy as needed, which may help to moderate more extreme market outcomes.

Fixed Income Markets

The first quarter of 2026 was characterized by increased volatility across global fixed income markets, driven primarily by a late-quarter escalation in geopolitical tensions. The period began on a relatively stable footing, with bond yields declining through February as inflation continued to moderate toward central bank targets and real GDP growth remained positive across major economies.

Market conditions shifted in March following a sharp rise in oil prices, which lifted the global inflation outlook. In response, bond markets repriced, with front-end yields increasing across G7 countries as investors adjusted expectations for monetary policy from expected rate cuts earlier in the year toward potential rate hikes.

In Canada, economic data remained resilient despite ongoing trade tensions. First quarter GDP growth is estimated at 1.5%, with full-year growth expected in the 1.0%–1.5% range. As a net exporter of commodities, Canada stands 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. In the United States, unemployment remained low at 4.4% and wage growth inched higher, supporting the view that labour markets are stable, despite concerns around potential job displacement from AI adoption. Prior to the March energy shock, Canadian inflation was trending close to target, with headline CPI at 1.8% year-over-year in February and core inflation at 2.3%. The surge in oil prices has since introduced renewed upside risks to the near-term inflation outlook.

Central banks remained on hold during the quarter, but market expectations shifted meaningfully. The Bank of Canada maintained its overnight rate at 2.25%, while pricing moved toward the possibility of 1–2 rate hikes later in the year. Similarly, the U.S. Federal Reserve held the Fed Funds rate at 3.50%–3.75%, while market pricing shifted from expectations of 50–75 basis points of rate cuts at the start of the year toward modest tightening by quarter-end.

Canadian bond yields moved higher and the yield curve flattened, led by increases in short-term rates. Two-year Government of Canada bond yields rose 24 basis points to 2.82%, while five-year yields increased 12 basis points to 3.09%. Longer-term yields were more stable, with 10-year and 30-year yields rising to 3.47% and 3.89%, respectively. These relatively modest quarter-end changes mask significant intra-quarter volatility, as the decline in yields observed in January and February was largely reversed in March.

While recent events can be compared to the 1973 oil embargo in terms of the disruption to global energy, the current environment differs in that real yields are materially higher, providing greater policy flexibility. Looking ahead, fixed income markets are likely to remain sensitive to inflation dynamics and geopolitical risks. The oil price shock has increased the risk that inflation proves more persistent than previously expected, limiting central banks’ ability to ease policy in the near term. At the same time, a prolonged conflict and tighter financial conditions may weigh on growth, increasing the probability of a more challenging macroeconomic backdrop.

In this environment, we believe a cautious duration stance remains appropriate, as elevated inflation uncertainty and geopolitical risks are likely to keep bond market volatility elevated over the near term.