Earnings growth continues to drive optimism in the markets, despite geopolitical backdrop

July 2026 Insights & Strategies

Macro Highlights forJune

• Canadian GDP rebounded 0.5% from March to April, easing concerns about the very modest declines in 4Q25 and 1Q26 that were labeled as a “technical recession”. Preliminary data for May suggests modest growth continuing, while uncertainty around potential USMCA revisions and further escalation in U.S. sector tariffs is keeping business sentiment subdued. The consensus forecast is for modest growth, of around 0.9%, in Canada in 2026, while the U.S. is expected to post stronger GDP growth of approximately 2.2%.
• Updated Canadian employment data will be released after this report is published, but expectations are for a slight increase in the unemployment rate, to 6.7% in June, from 6.6% in May. So far in 2026, Canada has lost 25k jobs, although with a slightly declining population, we haven’t seen a surge in the unemployment rate. The U.S. unemployment rate declined slightly in June, from 4.3% to 4.2%, although with a notable drop in the participation rate. Overall, the U.S. labour market remains stable.
• Until recently, the easing of tensions between the U.S. and Iran, with the partial opening of the Strait of Hormuz resulted in the price of oil retreating, and inflation pressures easing. This has pushed expectations for U.S. Fed rate hikes to later in 2026, but with inflation expectations still elevated. The BoC remains on hold with its policy rate, with lower inflation in Canada, weaker economic growth, and a higher unemployment rate.

Financial Markets in June

• The S&P 500 declined modestly, falling 1.1% on a price-return basis and 1.0% on a total-return basis in June. Despite the softer performance, the index’s 2Q26 gains remained impressive, with price and total returns of 14.9% and 15.2%, respectively, lifting year-to-date returns to 9.6% and 10.2%. Importantly, leadership showed more meaningful signs of broadening in the second half of the quarter.
• We expect this broadening trend to have further room to run, supported by resilient economic fundamentals and more attractive opportunities in lower-valuation areas of the market outside the crowded A.I. infrastructure trade. Within technology, however, performance is likely to remain shaped by two key tensions: A.I. infrastructure strength versus the capex burden for the Magnificent Seven, and traditional software companies versus A.I.-native challengers.
• The S&P/TSX Composite advanced modestly in June, gaining 0.3% in price and 0.5% on a total-return basis, while reaching a new high during the month. Despite Energy weakness following the reopening of the Strait of Hormuz and pressure on Materials from higher Fed policy rate expectations, cyclical leadership remained strong in 2Q26, led by Financials and Industrials. This lifted 2Q26 price and total returns to 6.4% and 7.0%, respectively, bringing year-to-date gains to 9.9% and 11.2%.

Upcoming

• Reigniting tensions in the U.S.-Iran conflict leave uncertainty about further escalating military actions, which could bring back oil supply and pricing concerns. A return to spiking oil prices could put upward pressure on inflation and increase the likelihood of interest rate hikes, primarily in the U.S.
• As the Section 122 tariffs expire on July 24, we expect a slew of country and industry-specific tariffs to come into force to maintain the protectionist platform and revenue generation that was disrupted as the IEEPA tariffs were struck down. While the USMCA agreement continues to allow ~85% of Canadian products to cross the border tariff-free, further tariffs could pose risks to multiple industries.
• While earnings growth expectations remain strong as we kick off 2Q26 earnings season, we will be watching A.I. capex related spending for any signs of cautiousness or scaling back in forecasts that could lower earnings expectations for tech companies.