As 2025 wraps up, investors are facing a mix of resilience, recalibration, and rising uncertainty. Despite plenty of headwinds—policy shifts, geopolitical tensions, and structural changes—markets have held up better than expected. Canada, in particular, has shown surprising strength, even amid trade disruptions and fiscal challenges.

What’s Working: Resilience & Innovation

Markets bounced back strongly in the second half of the year. The TSX and S&P 500 have made strong gains, with the U.S. market no longer being just about mega-cap tech, and Canada seeing a surge in financials and energy. We are seeing broader participation, which points to a more mature bull market.

Canadian equities have benefited from a more favourable interest rate environment and a valuation discount compared to U.S. markets, offering upside potential for a diversified portfolio.

AI continues to be a game-changer—boosting productivity and transforming industries from finance to manufacturing.

On the macro side, fiscal support in Canada has been robust, with the government investing in infrastructure, housing, and defence, which could provide tailwinds for growth in 2026.

What to Watch: Policy Fog & Fragile Fundamentals

Beneath the surface, cracks are forming. Earnings growth is slowing, and much of the recent rally has been driven by expanding valuations rather than fundamentals. The U.S. labour market is cooling, and policy uncertainty especially around tariffs and fiscal discipline is muddying the waters.

In Canada, trade tensions with the U.S. have weighed heavily on exports. The Bank of Canada responded by cutting interest rates, with further cuts possible if economic risks persist. While inflation remains within target, the central bank is reconsidering its inflation metrics due to distortions from mortgage interest costs.

Geopolitical risks—from U.S.-China tensions to regional conflicts—add another layer of complexity. Canada’s economy is particularly sensitive to U.S. trade policy, and maintaining CUSMA exemptions will be critical for export resilience in 2026.

2026 Outlook: Stay Nimble

Looking ahead, it’s about balancing optimism with realism. With traditional macro anchors like predictable inflation and fiscal discipline fading, investors need to get more tactical.

Themes like AI, sustainability, and domestic infrastructure will likely remain strong. But with high valuations, rising debt, and policy uncertainty, risk management is key. Diversification, active positioning, and a focus on quality will be critical as we move through the late stages of this cycle.

Adaptability will be the name of the game in 2026, and we are always here to guide you.

Written by: Duane Francis