Knowledge Centre

Financial markets encountered more choppy waters during the summer months as heavy government borrowing, elevated energy prices from the war in Iran, and climbing borrowing costs tested investor confidence. Yet underneath the noisy headlines businesses have proven durable. Corporate earnings have continued to top lowered hurdles, business investment has rebounded, and broader economic activity has managed to avoid a major breakdown. While higher borrowing costs and persistent geopolitical friction are testing resolve, markets are showing a bending condition rather than a breaking one.

At a time when Canada has felt under siege from cross border trade friction, the domestic equity market serves as an impressive counternarrative. Corporate Canada has quietly learned to thrive in an era of disruption with business profits jumping strongly on the back of deep natural resources in oil, base metals, and electrical power. While global headlines remained fixated on massive foreign technology companies, steady Canadian businesses quietly outpaced those celebrated giants over the past year. Domestic activity has stabilized as household spending prioritized essentials and business investment expanded. Washington’s latest tariff reshuffling also proved largely manageable in the big picture with trade relief on building materials and electrical switchgear softening the impact. The Bank of Canada is holding steady, providing a calmer interest rate backdrop than south of the border. Canada has benefited from cash generating banks, pipelines, and resource leaders that continue to display great staying power.

South of the border, the U.S. economy is navigating a more challenging stretch as a huge national debt and stubborn prices keep pressure on policymakers. The Federal Reserve lifted its benchmark interest rate, prompting bond markets to push long term borrowing costs to multi decade highs. At the same time, massive corporate spending to build artificial intelligence data centers has intensified competition for available funds. While U.S. families are showing fatigue as personal savings cushions dwindle, resilient consumer spending and this historic technology buildout continue to keep the broader economy moving forward.
Internationally, higher borrowing costs remain the main story across major developed economies. In Europe, long term lending rates touched multi year highs while Britain and France grappled with tighter budgets and elevated public debt. The Bank of Japan pushed bond yields to multi decade highs to support its currency and keep a lid on import costs. On the other hand, Emerging Markets have remained bright, supported by steady worldwide demand for industrial metals and energy. While government borrowing will keep global credit conditions tight, the multi year rise in bond yields appears to be finally reaching a plateau.

Stock markets experienced a much more muted and mixed summer following the relentless climb earlier in the year. Canadian stocks held firm near all time peaks, advancing 1.6% in the third quarter to bring the year to date gain to 13.0%. U.S. stocks edged up 2.3% in Q3 (all figures in Canadian dollar terms) and 16.8% YTD. International shares gained 0.9% during the quarter and climbed 14.8% year to date. Emerging Markets fell 0.2% but gained 28.2% for the year to date. Bonds remained pressured, returning -3.0% in the quarter and -0.8% for the year thus far.

Navigating through market swings requires looking beyond daily headlines and political theater. Canadian companies continue to pay healthy regular dividends and trade at far more sensible prices than their foreign counterparts, offering investment portfolios a welcome margin of safety. While trade debates and shifting interest rates will create temporary noise, well diversified holdings anchored in sound, cash generating businesses remain well positioned to reward patient investors in the months ahead.

The third quarter saw a tipping point of the tariff war after negotiations under CUSMA (Canada-United States-Mexico Agreement) broke down in August, further escalating trade tensions. As a result, the U.S. imposed a 50% Tariff on $27.6 billion worth of Canadian goods prompting the Canadian government to retaliate dollar for dollar with a 50% tariff on US goods a few days later.

Against that backdrop of heightened uncertainty, Canadian GDP has been remarkably resilient, gaining 3.3% in Q2 (annualized); the most since 2023. However, the job market presented a mixed picture with 42,000 job losses in August following a strong gain of 181,000 positions between April and July, including an increase of 75,000 jobs in July alone. Inflation has remained a key focus for markets as the prolonged disruption to shipping through the Strait of Hormuz has contributed to elevated energy prices, spurring concerns about persistent price pressures. The Bank of Canada (BOC) acknowledged that inflation has been hovering in the higher end of the range (around 3%). Nevertheless, it decided to keep its key rate intact at 2.25% in September as the core measure of inflation remained lower.

With lingering concerns over geopolitical developments, which show few signs of abating, the Canadian stock market retreated in September after reaching a record high in August. For the quarter, the S&P / TSX posted a modest 1.6% gain but has demonstrated remarkable resiliency, returning 13% year to date. The S&P 500 has also been strong with a 2.3% gain for the quarter and 16.8% year to date in Canadian dollar terms.

As in previous quarters, the energy sector has been the heavy lifter amid elevated energy prices on the backdrop of supply shocks stemming from the ongoing war in the Middle East. The sector led with a 17.4% gain over the quarter followed by Materials and Technology with 12.6% and 10.7% respectively. Year to date, Energy stands out again with a remarkable 45.8% gain. Financials, despite a 3.6% pullback in Q3, still showed strength with a 17% gain year to date. Materials benefited most from golds stunning reversal in August after months of underperformance and secured a comfortable 9.7% gain year to date. On the flip side, the traditional income producing sectors accounted for most of the detractors. Telecommunications and Utilities lost respectively 10.4% and 8.1% over the quarter amid a global selloff of debt and income securities fuelled by rising inflation.

Canadian markets and their global counterparts have been advancing positively this year although the path forward remains very fragile. On one hand, the energy supply disruption shows little signs of a quick resolution. Although the Iran war shifted to an apparent truce, the two sides are far apart in terms of negotiations to avert further conflicts; and hostilities could resume anytime. On the other hand, CUSMA and its failure to renew poses serious headwinds. Though its nonrenewal does not automatically imply a termination, the two sides are far from reaching a deal. In a recent report, Deloitte Canada estimated the economic output loss to be $402 billion over the next decade if the U.S. exists the agreement. Also, Deloitte noted that the exit scenario will not be cataclysmic but significant enough to weigh down future GDP growth. Finally, global stock markets have been rattled recently by the sharp rise in bond yields. In a surprise move, the Federal Reserve reversed from its previous dovish stance and raised the key rate 25bps. Hawkish pressures have been building with other global central banks but for the BOC, trade uncertainties, lower immigration, and notably a subdued level of core inflation constitute valid reasons to stay on the sidelines.

The Canadian government’s aggressive efforts to diversify trade and attract private investment, particularly in infrastructure projects, should help bolster business confidence and mitigate some of the economic headwinds arising from tariffs. These initiatives could provide an important source of support for the Canadian economy as it navigates an increasingly uncertain global environment.

It was a tough quarter for fixed income as the Canadian bond market retracted by 3.0% this quarter bringing the year to date performance into negative territory as well with a -0.8% return. On the positive side, Canadas yield curve is normally sloped with short yields around 2.3-3.3% and long term yields ranging from 3.9-4.3%, indicating a positive yield spread. Mid and long term bonds outperformed shorter dated bonds as they have a greater sensitivity to changes in the yield curve.

Historically, a positive slope across the yield curve is associated with ongoing economic expansion rather than recession and with all the fury surrounding trade talks and global conflicts, Canadian bond investors can look to yields as assurance that the markets expect stability.

The Bank of Canada (BOC) held its benchmark rate steady in its latest meeting citing improving economic data amidst the volatile energy markets following attacks launched by Israel and the U.S. in Iran. Iran effectively controls the Strait of Hormuz, a critical waterway where 20 million barrels of oil pass daily; approximately 20% of the world’s oil consumption. Energy prices have whipped back and forth as negotiations continue for extended peace.

South of the border, the Fed raised its benchmark interest rate for the first time since 2023 to battle stubborn inflation. President Trump has been clamoring for lower rates throughout his presidency but given the ongoing war, the resulting energy shock and increasing federal budget deficit, this is not expected to happen anytime soon.

Further complicating matters, the Trump administration has launched a tariff war with its trading partners across the globe and America’s greatest trading partner appears to be the primary target. Canada’s Prime Minister Mark Carney has not backed down from his southern neighbors slapping tariffs on over 700 American goods to match U.S. tariffs dollar for dollar. The latest American tariffs cover about 5% of the goods the U.S. imported from Canada last year while Canada’s tariffs cover about 6% of the goods the U.S. exported to Canada. Despite the tariff turmoil, Statistics Canada reported that Canada’s economy expanded thanks to stronger household and business spending boosted by increased exports as a show of resilience.

Although both neighbours are experiencing very similar tariff pressures Canada’s fiscal discipline has helped maintain investor confidence. However, Canada’s corporate bonds reflect a cautious outlook especially in the more interest rate sensitive sectors such as real estate and consumer discretionary.

Concerns continue to grow around America’s debt levels as credit agencies have already downgraded U.S. debt. Default is extremely improbable but American fiscal credibility has taken a hit. The U.S. government’s total public debt outstanding has eclipsed $40 trillion and the largest drivers of this debt are interest payments on the existing debt and health care subsidies.

All of these factors turn into insecurity over the future to which the bond market does not react well. As uncertainty rises, investors demand a higher rate of return (a higher yield) as compensation and bond prices have an inverse relationship with yields. The BOCs monetary policy will play an important role in shaping the bond market. While the BOC has shown its willingness to be flexible, much will depend on the trajectory of inflation and economic growth. Bonds continue to be a strong diversifier from equities.

U.S. Equities continued their momentum in the third quarter of 2026 with the S&P 500 delivering a 2.3% return outperforming global developed markets. The performance of U.S. equities highlights the resiliency of the world’s largest stock market. Despite growing geopolitical tensions, uncertainty around central bank policy and rising inflation, equities delivered as the S&P 500 reached multiple record highs over the summer.

In the first quarter, defensive sectors outperformed. Energy, Consumer Staples, Industrials, Materials and Utilities all generated positive returns while more growth oriented sectors such as Information Technology and Consumer Discretionary underperformed. Software companies in particular, fell victim to AI over growing concerns for the technology’s impact on traditional software business models.

There has been a healthy rotation back into hyperscalers (large cloud and data server operators) and software companies. Large cap technology companies carried U.S. equities in the third quarter as mid and small cap stocks performed poorly. The Information Technology sector has returned over 60% through the third quarter this year.

The tech sector was not alone here as energy stocks have shows similar success in their performance for 2026 thus far, rewarding investors for taking on such a volatile landscape. Despite the sectors surge, Energy continues to offer diversification benefits for core equity portfolios given its low correlation to the broad market.

Back in February, Israel and the U.S. conducted air strikes in Iran kicking off yet another Middle East conflict. Iran effectively controls the Strait of Hormuz, a critical waterway where 20 million barrels of oil pass daily; approximately 20% of the world’s oil consumption. Energy prices have whipped back and forth as peace negotiations continue.

Initially, price volatility can boost revenues for oil companies as production costs remain relatively stable as selling prices surge. However, as higher energy costs ripple through the entire economy it becomes abundantly clear that a healthy economy prefers price stability. Consumers, businesses and even governments rely on economic forecasts for decision making.

Another obstacle and a primary theme to Donald Trump’s presidency is tariffs. The Trump administration has launched a tariff war with its trading partners across the globe and America’s greatest trading partner appears to be the primary target. Canada’s Prime Minister, Mark Carney has not backed down from his southern neighbours slapping tariffs on over 700 American goods to match U.S. tariffs dollar for dollar. The latest American tariffs cover about 5% of the goods the US imported from Canada last year while Canada’s tariffs cover about 6% of the goods the US exported to Canada.

Tariffs and energy prices are making life expensive for Americans making the Federal Reserve’s interest rate decisions even more important. In September the Fed raised its benchmark interest rate for the first time since 2023 to battle stubborn inflation. President Trump has been clamoring for lower rates throughout his presidency but given the ongoing war, the resulting energy shock and increasing federal budget deficit, this is not expected to happen anytime soon.

The November election is quickly approaching with the power of Congress up for grabs and although historically markets have generally shown a limited reaction to midterm elections given the power of the executive branch, it will be a good gauge on Americas appetite for change. The American stock market is leading its counterparts but there is clearly still a need for a well diversified portfolio given the risks.

Throughout the summer months, international markets contended with a testing crosscurrent of climbing borrowing costs, renewed energy shocks, and mounting government debt. Pressures to crude oil and natural gas prices have remained elevated, driven by the ongoing war in Iran, and forcing overseas central banks to remain vigilant and tighten credit conditions. At the same time, heavy sovereign bond issuance across developed economies pushed long term yields toward multi decade highs, tightening financial conditions and testing investor resolve. Yet corporate earnings continued to demonstrate staying power and global economic activity managed to avoid a major breakdown. While persistent inflation and higher interest rates are forcing markets to transition toward late cycle discipline, conditions remain solid.

Europe’s energy woes were in the news again in a way reminiscent of earlier shocks; with the continent facing a prolonged closure of the Strait of Hormuz, low gas inventories, and the risk of fuel export limits. The European Central Bank raised interest rates to lean against inflation driven by higher fuel bills, while acknowledging that underlying price pressures and wage growth have slowed. As higher energy costs have halved corporate revenue growth over the past three years, European businesses have steadily adapted by controlling expenses and stabilizing earnings. Continental value companies trade at sensible prices that already discount higher power costs providing a tangible cushion for patient investors.

Across the English Channel, the U.K. economy maintained a steady growth footing amid shifting policy priorities and persistent cost of living hurdles. The Bank of England kept its benchmark interest rate on hold as a welcome drop in consumer prices provided breathing space, even as policymakers monitored the risk of renewed energy inflation. While elevated gilt yields and public borrowing constraints demand fiscal caution from new government leadership, British companies with substantial global operations continue to generate reliable revenues. In the background, fiscal commitments to shield consumers and foster domestic enterprise offer a constructive counterweight to broader economic malaise.
In the Asia Pacific region, Japan is experiencing a generational shift as decades of falling prices give way to sustainable wage gains and rising domestic demand. The Bank of Japan pushed bond yields to multi decade highs to support its currency and manage import costs which have begun to attract domestic institutional capital back home. Elsewhere in the region, Australia lifted borrowing costs to tame price pressures, while dynamic exporters across Asia benefited from sustained global demand for industrial components and technology equipment. Although rising sovereign yields have introduced volatility, the transition toward normal borrowing conditions reflects a healthier, reflating regional economy.

Stock markets experienced a much more muted and mixed summer following the relentless climb earlier in the year. International developed shares gained 0.9% during the third quarter and climbed 10.8% year to date (all figures in U.S. dollar terms). European stocks fell 2.0% in the quarter and only gained 3.8% for the year. U.K. stocks rose 2.0% in Q3 and advanced 8.2% year to date. Japanese stocks climbed 6.1% during the quarter but held onto a solid 23.0% gain for 2026. Asian developed markets collectively advanced 3.8% in the quarter and climbed 16.1% year to date.

Navigating through international market cycles requires looking beyond daily headlines and political theater. Established overseas businesses provide essential goods, operate critical transport networks, and continue to pay attractive regular dividends that arrive regardless of political maneuvers in Berlin, London, or Tokyo. While higher interest rates and geopolitical friction will naturally create periods of temporary noise, well diversified holdings anchored in sound, cash generating international companies will likely remain rewarding in the future.

Emerging Markets navigated a volatile summer as the combined pressures of elevated fuel costs, climbing benchmark bond yields, and shifting global interest rate expectations tested investor resolve. At the same time, heavy sovereign debt sales in developed nations pushed worldwide borrowing rates to multi decade peaks, tightening international capital flows and increasing currency swings. Yet developing economies have demonstrated far greater structural discipline than during previous cycles, avoiding liquidity crunches through proactive central bank policies, comfortable foreign reserves, and deeper local financing networks. While external financial conditions remain restrictive, underlying economic foundations are improving.

In China, economic activity charted a split course as high technology manufacturing and foreign commerce balanced sluggish domestic consumer spending. Industrial facilities turning out green technology components, semiconductors, and artificial intelligence hardware recorded robust international shipments, reinforcing the country’s central footprint in global supply lines. In contrast, the lingering weakness in residential real estate continued to depress household sentiment, leading families to hold back on discretionary spending. While trade disputes with Western partners remain an ongoing point of friction, expanding commercial links with Southeast Asia and Latin America have provided an effective outlet for manufactured goods.

Across emerging Asia quarterly performance was defined by sharp swings within the technology hardware sector. South Korea and Taiwan continued to benefit from immense worldwide orders for advanced memory chips and fabrication equipment. However, following a powerful market run earlier in the year, technology shares experienced a sharp summer pullback as rising capital costs, local regulatory reviews, and new competitive entries triggered profit taking. In India, steady consumer purchases and extensive public infrastructure spending provided regional stability even as central bankers carefully managed imported energy bills to protect the domestic currency. Despite short term market gyrations, the region’s dominance in producing foundational digital equipment remains a long term engine for corporate profitability.
In Latin America, regional economies drew strength from steady commodity demand and the continued redirection of multinational supply chains. Mexico maintained a solid manufacturing pace as corporate investment in border factories supported industrial production, while a strong currency lowered import bills even as it trimmed export profit margins. In South America, steady demand for essential resources like copper, lithium, and crude petroleum bolstered fiscal balances across Brazil and Chile, helping insulate domestic credit conditions from external shocks. Although regional weather shifts caused localized crop and electrical power interruptions, proactive central bank policies and expanding local currency debt markets helped keep overall finances on an even keel.

Stock markets experienced much more muted and mixed results in the quarter following the surging returns earlier in the year. Emerging market equities slipped 0.2% in the third quarter, leaving them up 23.7% year to date (all figures in U.S. dollar terms). Asian stocks bumped up 1.8% during the quarter as technology hardware consolidated holding a 25.1% gain for the year. Latin American stocks gained 4.0% in Q3 and advanced 15.2% year to date bolstered by firm resource prices. Emerging European equities rose 11.5% in the quarter and climbed 27.9% for 2026.

Long term market success in Emerging Markets depends on distinguishing headline anxiety from reality. Today’s emerging economies are no longer fragile bystander nations but essential suppliers of the copper, energy, and digital processors that drive modern worldwide industry. With many overseas companies supported by conservative corporate balance sheets and trading at sensible valuations relative to historic norms, disciplined participation across these expanding markets continues to offer attractive growth and diversification for patient investors.

The third quarter was marked by significant volatility and uncertainty much like the preceding months. Geopolitical headwinds, particularly the Iran war and ongoing global tariff tensions, remained the primary disruptors of the global economy. In Canada, business confidence continued to be eroded on the backdrop of ongoing trade tensions while rising inflation significantly pared back consumer spending. Gross domestic product had been on a soft patch at the start of the year, growing just 0.3% in the first quarter. However, it rebounded strongly in the second quarter with annualized 3.3% growth, outpacing Bank of Canada’s initial estimate. Early projections for the third quarter are positive. The job market was mixed with 75,000 new jobs in July and 42,000 losses in August. The Bank of Canada (BOC) has held its key rate at 2.25% since October 2025. Unlike some of its global counterparts, such the U.S. Federal Reserve which decided to hike amid yield volatility, the BOC is expected to maintain the status quo in the upcoming months given ongoing trade uncertainty and continued slack in the economy.

Global REITs had a challenging quarter. Unlike their broader market counterparts such as the S&P / TSX or S&P 500, which managed to close with gains, most REITs ended the third quarter with losses despite relatively positive second quarter earnings. The weakness was mostly attributable to global rate volatility and the repricing of financing costs. The S&P / TSX REITs started the quarter with a 0.3% gain in July but declined in the subsequent months to return -7.5% for the quarter. Despite the quarterly decline the index is still above water with a 4.5% gain year to date. The MSCI Global REIT index exhibited a similar pattern, returning -5.8% for the quarter and 9.6% year to date (In Canadian dollars terms).

Heading into the third quarter, the office segment continued to build on the full year recovery observed in Q2. According to CBRE, a leading commercial real estate services and investment firm, net absorption totaled 2.0 million sq ft and 9 out of the 11 markets reported gains. Although vacancy rates narrowed down to 16.7%, the spread between product tiers (i.e. class A buildings versus classes B and C) ticked to historical highs, with class A buildings reaping the lion share of leases. Globally, office fundamentals have also been on a path toward normalization. In the U.S. office conversions and demolitions have surged notably relative to new completions, improving supply and demand. Like in Canada, prime office buildings (class A) continue to attract most of the occupants. Against the backdrop of AI trends, technology firms are increasingly signing for long term office leases with a preference for prime office space.

The Canadian industrial segment was initially thought to be a natural victim of the tariff dispute between the U.S. and Canada, particularly in manufacturing-intensive provinces such as Ontario. However, the segment has been holding steady with leasing activity picking up. Morguard (a real estate investment and management company) reported that as of the second quarter industrial property transactions of at least $10 million reached $2.1 billion in the country’s five largest markets; a 32.8% increase over the previous period. Meanwhile, the retail segment has been recuperating from the closure of Hudson’s Bay stores a year earlier along with a jump in overall vacancies rates. However, that rate has held steady over the past year as soft absorption has been offset by similarly subdued construction activity.

As for residential, there is a wide divergence across Canadian housing markets with some pockets experiencing a drop in property values while other are showing stabilization. RBC, in a recent report, notes a step toward recovery supported in part by improving inventory levels. One notable development is that the average rent has been in decline for two full years, the longest streak in recent history. This suggests that there is still more road to travel in the path toward full stabilization in the residential market.