Macro & Strategy - January 2026

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Fuel

“Give me fuel, give me fire, give me that which I desire” - Metallica

Well, one thing we can’t say is that 2025 was a boring year. Starting with Trump 2.0’s inauguration day on January 20, the global economy, and markets, took us through the whole spectrum of emotions.

From the early optimism of deregulation fuelling hopes of a growth surge, to the uncertainty sparked by reciprocal tariffs pushing long rates higher, 2025 delivered a rollercoaster. The eventual policy pivot stabilized markets almost overnight, only for the narrative to shift again as mega-cap tech—led by Nvidia, Meta, Microsoft, and their Magnificent Seven peers— reclaimed centre stage. It was a year defined by rapid turns and dominant themes.

Coming off such a monstrous year, what can investors expect to dominate the macroeconomic narrative in 2026?

We think the new year will generally see a continuation of the previous one. The United States should keep the pressure on its trading partners, and Canada should be in the forefront with the scheduled renewal of the Canada-U.S.-Mexico Agreement. The artificial intelligence narrative should continue to dominate the news flow, and investments in data centres should stay in the hundreds of billions of dollars throughout the year. The global economy should continue to plow forward at a moderate pace, and global inflation looks, at least for now, as if it will remain under control.

But where our views are unclear, and where we see a fork in the road, is in the behaviour of the U.S. Federal Reserve, which markets expect will deliver all the fuel they so deeply desire to continue charging forward.

Highlights

• Accommodative global monetary policy should support an acceleration of the economic cycle in 2026.
• Canadian and emerging market equities are well positioned to outperform, driven by rising gold prices and optimism around infrastructure.
• We maintain an overweight position in equities, with a preference for Canada, Asia, and emerging markets.

Markets in 2025: High octane

The year 2025 closed once again on an exceptional performance from equity markets. After returning 26% in 2023 and 25% in 2024, the S&P 500 posted yet another impressive total return in 2025 with 18%.

Looking at the index’s long history, we see that the latest three-year stretch ranks at the 90th percentile, obviously causing investors to wonder whether the future promised by the dawn of AI is already baked into the cake.

But, despite the AI-heavy headlines, 2025 was not a year of U.S. outperformance. It was actually Canada’s very own S&P/TSX that stole the show, with a solid 32% total return on the year, powered by the surging price of gold and, it seems, some market optimism toward the Carney administration’s plan to boost infrastructure and defence spending.

Equity markets in Europe, Asia, and emerging markets also outperformed the main U.S. index in 2025, but we ended the year with elevated valuations and hefty expectations for earnings growth in 2026, at least outside Japan.

As for fixed income, 10-year yields were down in the U.S. on hopes for ever more Fed rate cuts, and stable in Canada as the Bank of Canada finished its cutting cycle. The top stories of 2025 were obviously gold, which is being steadily accumulated by central banks looking to diversify away from fiat currencies, and the U.S. dollar, which cracked early in the year on the dedollarization theme. The loonie performed well, and we expect continued gains as Canadian prospects remain underestimated.

So, as we sit down together and read the tea leaves on the year to come, we propose to tackle the following questions.

Where do we stand in the global business cycle? Second, what will matter to the mighty U.S. economy in 2026? Third, what are the prospects for the Canadian economy? And, finally, where can investors make money in 2026?

Start your engines, and let’s go for a ride.

The global economic cycle: Fuel is pumping engines

One of the most puzzling conversations our team had all year came in November.

On a panel with a few esteemed fellow economists, we found ourselves in the minority position of opining that we aren’t halfway through this global business cycle. Not only did our colleagues cite the usual baseball analogy of a cycle currently in the seventh or eighth inning, but they also argued that the Fed was late to the game and putting the cycle at risk by not cutting quickly enough.

Now, we’ve been around long enough to understand how the herd effect works, and how misery loves company. But, on this one, we’re convinced that the data fly in the face of any argument based on the k-shapedness of the post-COVID recovery.

Our proprietary monetary-policy-cycle leading indicator is pointing to a rather bullish continuation of the current cycle. In plain English, global central banks have coordinated their rate cuts over the past 18 months, adding ample fuel to the global economy. As the chart below shows, the global economic cycle is likely to accelerate in the coming year as easier monetary policy works its way through, with the usual lags.

Adding to global monetary policy, we also see in a positive light China’s pragmatic approach to steering its economy out of its recent slump.

China closed 2025 with its most aggressive policy stance since the global financial crisis, determined to defend a 5% growth target despite structural headwinds and trade frictions. Beijing has lifted its fiscal deficit to a record 4% of GDP and has already issued 1.3 trillion yuan in ultra-long special treasury bonds alongside 4.4 trillion yuan in local government bonds to fund infrastructure and strategic projects.

On the demand side, consumer stimulus has taken centre stage, with expanded trade-in programs for durable goods, higher pensions, and health care subsidies signalling a pivot toward household spending. Monetary policy remains accommodative, with rate cuts and targeted liquidity facilities helping stabilize property markets and equity flows. Looking beyond 2025, we see that the 15th Five-Year Plan is set to prioritize tech sovereignty, green energy, and innovationdriven growth, while gradually rebalancing toward consumption, a delicate act as China seeks resilience in a slower global cycle.

Although our macro view is clearly positive for 2026, let’s not underestimate the main risk to our view: Global growth outside the U.S. isn’t moving in sync.

Europe has cut rates aggressively, but that’s not the real issue. The question is whether fiscal reforms and productivity gains will actually materialize. So far, the track record is weak. Moreover, without structural change, rate cuts alone won’t deliver a sustained recovery.

Emerging markets are split. Asia’s exporters are gaining traction, but commodity-heavy economies remain exposed to price swings and capital flows. Canada looks better positioned, yet its investment cycle is still behind the curve. This lack of alignment is a risk for any bullish global call. If these cycles pull in different directions, policy moves and capital flows could get messy. And if the U.S. dollar doesn’t weaken as expected, that could tighten conditions for emerging markets and amplify volatility.

For 2026, the upside case depends on more than simple growth. It depends on aligned cycles, without divergence that could derail confidence.

U.S. economy: Still in the driver’s seat

Before diving into the Fed and the nominal side of things, let’s start with the real economy.

The defining feature of the U.S. macro landscape as we head into 2026 is the surge in AI-related capital expenditure.

Hyperscaler capex is set to grow another 33% after a 69% jump in 2025, with data centre construction and tech equipment investment now accounting for 1.5% of GDP. Yet, the direct GDP impact remains muted; most hardware is imported, offsetting much of the domestic investment boost via a wider technology trade deficit. 

The real story is about potential productivity gains. Nonfarm productivity growth is expected to hover near 1.5%, a middling outcome, as AI’s aggregate effects are still slow to diffuse. Even though industry anecdotes and microdata point to efficiency gains in some discrete, white-collar tasks, broadbased macro impacts are likely to remain elusive for a few years. According to McKinsey & Company, the deployment phase continues, with 88% of surveyed organizations using AI in at least one business function, but only 7% of surveyed firms reporting mature AI implementations.

As for U.S. consumers, by far the most important economic agent in the world, the much-discussed K-shaped consumer recovery, with upper-income households outpacing lower-income peers, is real but ultimately not decisive for the 2026 macro outlook.

This bifurcation suggests that any stress from higher borrowing costs will disproportionately affect discretionary spending at the lower end, but the macro impact remains muted unless job losses accelerate.

Beyond income segmentation, demographic trends will shape consumer behaviour in 2026. Millennials entering their peak earning years and Gen Z’s rising labour force participation provide a structural lift to aggregate consumption, even as aging baby boomers shift spending toward health care and experiences. These forces create a baseline of resilience, suggesting that cyclical headwinds, such as tighter credit or modest labour market cooling, are unlikely to trigger a broad retrenchment, absent a severe shock.

The main risk factor for the U.S. consumer is the wealth effect. Equity valuations and housing prices are critical confidence anchors for upper-income households, which account for a disproportionate share of discretionary spending. A sharp correction in either market could amplify downside risks, not through direct income channels but via sentiment and precautionary saving. Conversely, if asset prices remain stable, consumer confidence should support risk appetite.

Politically, 2026 should be charged. Republicans are entering the campaign for the 2026 midterms on shaky ground after a series of disappointing poll results. A December AP-NORC poll showed that approval of President Trump’s handling of the economy has plummeted to 31%, down from 40% in March, and his lowest rating on economic stewardship in either term so far. Troublingly for Trump’s campaign, confidence in his performance is slipping even among GOP voters, with Republican approval declining from 78% in March to 69% in December. With affordability and cost-of-living issues reigniting voter concerns during recent off-year elections, Republicans are forced to make economic resilience their central pitch.

In terms of voter sentiment, the GOP also appears politically vulnerable on broader issues. The AP-NORC polling also flags weakening confidence in Trump on immigration and crime, two of his historically stronger vectors, with approval on immigration falling from 49% to 38%, while support on crime dropped from 53% to 43%.

These slippages suggest that Trump’s hallmark tough-on-security messaging is losing traction, especially among independents and swing voters. As a result, with midterms traditionally considered a referendum on the President’s party, both Republicans and Trump face the prospect of mounting headwinds driven by consumer unease and softening key-issue appeal—raising the stakes for campaign strategy in the months ahead.

Summing up the risks to the real economy for 2026 and beyond:

• AI and tech: A technological setback in the AI theme— whether hardware, software, or regulatory—could swiftly shift the outlook for data centres and capex, with knock-on effects for investment and financial market sentiment.
• Market correction: A significant equity market correction could catalyze a recession, given the outsized impact of top earners and the wealth effect on consumer spending. With household net worth at record highs, the marginal propensity to consume out of wealth remains a key transmission channel.
• Fiscal risk: Although an unlikely scenario with the recent signing of the One Big Beautiful Bill Act, the U.S. government may be pressured by markets to address its debt situation sooner than expected. With the deficit holding near 6.2% of GDP and debt sustainability concerns rising (see last month’s discussion here), any abrupt fiscal tightening could weigh on growth.

In sum, as AI capex and productivity optimism dominate the narrative, the macro cycle remains vulnerable to shocks in technology, fiscal policy, and asset prices. The K-shaped consumer story is valid, but it’s not the main macro lever.

Turning to the nominal and financial side of things, we would ask that anyone with a strong conviction about the Fed’s immediate need to ease take a good hard look at financial conditions (see chart below).

Financial conditions (namely the overall environment for borrowing, lending, and investing in an economy, shaped by interest rates, credit availability, asset prices, and exchange rates) are, according to Bloomberg’s estimate, still solidly in supportive territory.

In this light, any expectation that the Fed should rush in with multiple cuts seems misguided, as it relies solely on the labour-market part of the Fed’s mandate and ignores the key inflation mandate.

Yes, the U.S. unemployment rate has risen by close to a full percentage point in a year, but the level of unemployment, and the little-hiring-little-firing equilibrium we are in does not scream for a more accommodative monetary policy.

Looking at the Fed problem from a different angle, we argue that if U.S. monetary policy was indeed restrictive, we would know: The yield curve would be inverted, equities would be struggling, inflation would be below target, consumer spending would be subdued, etc. But, seeing pretty much the reverse across the board, we stand by our argument that it’s mostly the political pressures that are making their way to the Federal Open Market Committee.

Now, although we don’t think rate cuts are warranted by financial or labour market conditions, we do side with markets and expect multiple rate cuts in 2026.

Let us explain.

Fed: Quench my thirst with gasoline

2026 will be a pivotal year for the Fed, marked by a leadership transition and heightened governance risk.

The saga gets going in January. Stephen Miran’s seat will open, giving the White House an easy path to nominate Kevin Hassett or Kevin Warsh (both leading the race at this writing) as Governor first, then Chair when Powell’s term ends in May.

The new Chair’s first task will be to align the central bank with the current administration’s priorities. Even though most other Governors have long terms, the structure of the Board could shift if political pressure or voluntary exits accelerate.

The possibility that Lisa Cook will be removed from the Board remains low, but her ouster would pave the way for a more pronounced Trump-aligned majority.

Still, this leadership transition could reshape the Fed’s tone and reaction function. A Trump-aligned Chair would most likely emphasize growth and employment over inflation risks, signalling a bias toward earlier rate cuts if economic softness emerges.

Markets should expect more frequent references to “policy flexibility” with less emphasis on forward guidance and increasing volatility around FOMC meetings. Even though the Fed’s institutional framework limits abrupt shifts, even subtle changes in messaging, such as prioritizing real wage gains or playing down balance sheet runoff, could influence expectations and term premiums.

Our base case is a divided but functional Fed. We see the possibility of a few other scenarios, but political elements are key to our outlook, as macro considerations take a backseat.

Our assessment of the balance of risks leads us to expect a weighted average rate of 3.25% by year-end, which is only 50 basis points away from where we ended the year. So, yes, we also expect cuts, even though we oppose them, but we have a strong feeling that market pricing of these cuts will be volatile along the way.

Canada: Beyond oil, cold, and hockey

2025 was the year of the S&P/TSX, as gold miners gained over 135%. But economic growth was rather subdued, probably clocking in barely above 1%.

As Canada was swept by the Trump tsunami and the Bank of Canada claimed victory in its fight against inflation, the onus fell squarely on the federal government to reshape a heavily U.S.-dependent economy into a self-reliant energy powerhouse.

Even though the recent budget made ambitions for economic renewal clear, the missing ingredient remains a decisive spark to unlock business investment. Ottawa’s infrastructure and nation-building projects are promising, but their macro impact will be felt more in 2027 and 2028. For 2026, the challenge is to shift business sentiment, which has been on shaky ground for close to three years. Regulation is easing but remains a drag, and the willingness of provinces to collaborate is eroding, adding to the uncertainty.

Despite these headwinds, we think the consensus on Canada’s economic outlook is too pessimistic. The most recent reading suggests another slow year of 1.2% GDP growth in 2026, a rather low bar for an economy that could benefit from a consumer and investment-driven tailwind right out of the gate. The fundamentals of stable institutions, a skilled workforce, and a renewed focus on productivity all support a more constructive view.

On the external front, trade diversification is becoming a strategic priority. Ottawa’s goal to double non-U.S. trade over the next decade is a bold and timely pivot amid uncertainty over CUSMA and U.S. politics. Even though Trump’s constraints make the worst-case scenario less likely, Canada must accelerate new trade corridors and deepen ties with Europe and Asia to reduce its vulnerability to U.S. policy shocks.

The 2026 CUSMA review adds risk. Signals from Washington hint at a shift toward bilateral deals, which could mean renegotiating terms under more transactional conditions, disrupting supply chains and raising compliance costs.

Even so, a bilateral framework could allow Canada to secure tailored provisions on energy and digital trade. Ottawa’s leverage lies in its role as a critical U.S. energy supplier, limiting the scope for aggressive tariffs. Still, fragmentation of the North American trade architecture is a real risk.

Does Canada have bargaining power in the Trump era? Yes. As a top oil and gas producer supplying more than half of U.S. oil imports, Canada holds a strong hand. Tariffs on Canadian energy would raise U.S. consumer costs, a politically costly move. Energy is Canada’s ace in the hole.

Ultimately, diversification is key. The Trans Mountain Pipeline opens Pacific corridors, reducing U.S. dependence and strengthening Canada’s global position. This pivot toward Asia and Europe signals a growth model that leverages resource strength while preparing for the energy transition. In 2026, the mandate is clear: Act with confidence. Canada has the tools to turn uncertainty into opportunity.

But what Canada badly needs, now more than ever, is cohesion at the provincial level. Although we are generally optimistic about the economy, we recognize that Canada’s ambitious plan will go only as far as social acceptance goes.

Our scenario-based approach can be summarized as follows:

• Optimistic scenario: CUSMA is renewed with only a few minor tweaks. Businesses respond to policy signals and regulatory easing by ramping up investment, especially in technology and productivity-enhancing sectors. Provinces work together to continue easing internal regulation on interprovincial trade. External trade diversification accelerates, with concrete progress on new corridors and agreements outside the United States. Canadian economic growth surprises to the upside, outpacing the consensus and laying the groundwork for solid gains on Canadian assets, especially the Canadian dollar. Odds: low at 10- 20%.
• Base-case scenario: A new trade deal with the U.S. is reached in the second half of 2026, consisting of a modified CUSMA or a new bilateral deal. Business investment picks up gradually but remains below potential as regulatory and interprovincial barriers persist. Infrastructure projects and trade diversification efforts move forward, but the impact is more visible in 2027 and beyond. Canada posts decent growth that slightly exceeds the consensus. Odds: high at 50-60%.
• Pessimistic scenario: The CUSMA renewal process gets stuck as Trump plays hardball, leaving Canadian exporters gasping for air.

Business investment stalls amid lingering regulatory uncertainty and lack of provincial cooperation. Trade diversification efforts falter, leaving Canada exposed to U.S. policy risks. Growth disappoints, and consensus pessimism proves justified. Odds: medium at 20-30%.

So, where can investors make money in 2026?

2026 is shaping up to be a year where markets are caught between resilience and uncertainty, so flexibility is your friend. Growth is set to accelerate, but the list of potential risks is long. Inflation is coming down, but not all the way. Policy is still in the driver’s seat, and AI remains the main investment theme.

Let’s start with equities.

The U.S. is still the world’s main event. We expect the S&P 500 to keep climbing and potentially post double-digit returns yet again. Earnings growth looks solid, especially as the AI investment cycle broadens beyond the mega-cap tech names. Financials and cyclicals are getting more attention. Valuations are high, but so are buybacks and payout ratios. The main risks to our view are that the Fed doesn’t deliver the fuel that is so desired, and the possibility that the data centre spending frenzy abruptly comes to a stop on an unforeseen technological or market development.

Canadian equities are in an appealing spot right now. The overall tone from global investors is cautiously positive, with a few clear drivers to watch. With the Bank of Canada most likely having finished raising rates and with inflation under control, the macro backdrop for 2026 looks very attractive.

The TSX/S&P remains cheap relative to the S&P 500, and expected earnings are elevated. If we add to the outlook a possible global rotation out of tech and into value or cyclicals, and if gold continues to shine, Canadian equities could be set up for another year of outperformance, especially given their sector mix. But keep an eye on the Canadian dollar and global commodity prices, as those could swing sentiment quickly.

Europe is in a better spot than it’s had in years. Fiscal stimulus in Germany is finally kicking in, and the earnings outlook for the region is positive. The ECB is likely to hold still and keep rates low, which could further inflate valuations. Still, Europe faces structural challenges, such as competitiveness and political fragmentation, so don’t expect a straight line up.

The outlook for Japan is harder to predict. Growth is moderate, and the yen is expected to strengthen as the Bank of Japan slowly normalizes policy.

Japanese equities are underweight in most global portfolios, and that probably won’t change unless we see a real shift in domestic demand or a surprise from the Bank of Japan.

Emerging markets are entering 2026 in a position of strength. Policy is prudent, balance sheets are healthy, and Asia in particular is set to benefit from the global tech cycle. Taiwan and South Korea are standouts. Latin America faces some election-related volatility, but EM assets look resilient over all. We expect the EM complex to outperform developed world indexes in 2026.

Let’s turn to fixed income.

The Fed’s behaviour remains the wild card. Given the political nature of the outlook there (see our previous section on the topic), we enter the new year with ample humility. Globally, we expect long yields to drift higher as central banks move toward neutral. We see the U.S. 10-year Treasury yield approaching 4.5% by year-end, and Canadian yields could also bounce higher toward 4.0% on a better-than-expected economic performance. The main risks for yields are fiscal slippage, oil price shocks, and the unpredictable impact of AI—will it be disinflationary, or will it push up equilibrium rates?

Credit spreads are set to widen a bit as the U.S. cycle gets choppier. Canadian and European credit is favoured, especially investment grade, thanks to healthier banks and the lagged effect of rate cuts. The big risks are a market correction, policy mistakes, and the impact of AI on jobs and leveraged sectors.

Looking at currencies, we think the U.S. dollar will continue to fall. The euro is expected to strengthen, with EUR/USD possibly reaching 1.25 by year-end, and the loonie should march higher towards 75 cents. The main risk to this outlook, although not a very likely one, is that the U.S. pulls off a productivity boom thanks to AI, giving the dollar a second wind. Still, if AI’s benefits spread globally, other currencies could catch up.

As for commodities, the outlook for oil is bearish. Supply growth from OPEC and non-OPEC producers alike is outpacing demand, and the rise of electric vehicles is starting to bite. OPEC might cut quotas if prices fall too far, but it’s hard to see a path back to tight markets before 2027.

Gold will continue to stand out as a strategic asset in 2026. With central banks signalling the end of rate hikes and inflation showing signs of cooling, gold’s appeal as a hedge remains strong.

Uncertainty around global growth, persistent geopolitical risks, and the potential for a weaker U.S. dollar all support the case for holding gold. If volatility picks up or real yields drop, gold could see renewed inflows from both institutional and retail investors. In short, gold is still doing its job as a portfolio diversifier and a safe haven.

Bottom line

Staying nimble will be vital in 2026. The baseline is constructive, with resilient U.S. growth, supportive policy, and the ongoing AI investment cycle. But markets are still vulnerable to shocks. Focus on quality, liquidity, and the ability to pivot quickly as the story evolves.

POSITIONING

We are maintaining an overweight position in equities, despite the significant run enjoyed by this asset class in 2025. Even though we acknowledge that they come with high valuations and expectations, we think the big picture remains supportive: continued earnings growth at a time of broadly easing monetary policy and financial conditions. Given that we expect growth to improve in the first half of 2026, a broadening, or change in leadership, could take place in equity markets, increasing the list of beneficiaries. In this context, we favour Canada as well as Asian and emerging markets, where valuations remain compelling relative to developed peers, and earnings momentum is improving. In Canada, we think commodity exposure will continue to be advantageous at a time of sticky global inflationary pressures and strong capital expenditures.

Our stance on government bonds remains nuanced. The expected boost in U.S. growth in the first half of 2026, combined with continued fiscal dominance and significant issuance, pressures global term premia and challenges the case for extending duration. We acknowledge that the higher yields on offer provide better expected returns and an improved ability to act as an effective hedge in portfolios. That said, despite the better valuations, the current macro environment remains challenging for fixed income. In Canadian fixed income, we think markets will increasingly expect a Bank of Canada rate hike by the end of 2026, especially if the Canadian growth environment improves. This context also informs our currency positioning, such that we continue to prefer the Canadian dollar over the U.S. dollar. Against this general backdrop, we prefer to maintain flexibility and avoid adding duration risk for now.

We continue to hold a constructive view on commodities, particularly base metals such as copper, aluminum, and zinc. These assets have historically acted as effective inflation hedges and stand to benefit from the forecast global growth improvement and rising inflation expectations as the Federal Reserve cuts rates into a cyclical upswing. Beyond the cyclical appeal of these metals, structural demand drivers linked to electrification, the AI infrastructure build-out, and the energy transition add to the long-term case for them.