(performance data as of July 31, 2026)
“Is it entrepreneurial confidence or economic anxiety wearing a founder’s hoodie?”
– Scott Galloway, questioning how to interpret small business filings
Remember those blockbuster Q1 S&P 500 Index1 earnings reports? What if U.S. companies actually didn’t earn as much money as we thought? What if their earnings were artificially inflated by artificial income on artificial intelligence (AI) exposure? And are we truly in the midst of a small business boom, or is new data from the U.S. Census Bureau a wolf in sheep’s clothing?
Amidst a flat month for U.S. equities and one nearing correction territory for Big Tech, new research from a University of Florida professor of finance, Bao Lian Wang, suggested that Q1 earnings were artificially inflated by 12%2. There’s an obscure accounting standard known as ASU 2016-01, which includes, among other things, the requirement that companies measure and reflect the fair value of their equity investments directly within net income. In other words, unrealized gains or losses on public or private stock holdings are included on the income statement. Let’s re-emphasize that point – despite these being unrealized gains, they are nonetheless being realized as income/earnings on the income statements of some of the largest companies in the world. As Ed Elson of Prof G Markets points out, these unrealized gains/losses have historically been rounding errors, but in the age of AI, that is no longer true.
Professor Wang estimates that valuations for private equity investments accounted for about 12 cents of every dollar of profit in the S&P 500 in Q1 of this year and that, without those markups, S&P 500 earnings growth would have been 16% – still very healthy, but also exactly in line with its 5-year average. In Q1, Alphabet, Amazon and NVIDIA alone reported a combined US$69B of profit on their AI investments in companies like Anthropic and OpenAI. To be clear, these companies aren’t engaged in shady practices. This is all above-board accounting as per updated rules from 2016. The problem is that investors are using these earnings as the basis for valuations. But are unrealized gains on stock holdings (potential profits that are clearly outside of typical operating activities) really a sound foundation upon which to estimate the revenue-generating ability of a company? With an increasingly large proportion of earnings coming from private AI holdings, it seems fair to ascertain that earnings – and by extension, stock market valuations – are primed for more volatility. We’re seemingly operating in a financial world where it’s becoming increasingly difficult to know what’s real and what’s artificial. Earnings growth was solid, regardless of how you look at it, but was it good or was it blockbuster? That depends on whether you accept some questionable private market valuations in AI.
Elsewhere in the AI sphere, we saw investors selling out of long-dated AI debt amid what the Financial Times called “growing fatigue” over how much was being spent by Big Tech and concerns over whether the multi-trillion-dollar AI infrastructure investment will eventually deliver the profitability investors are expecting based on lofty valuations. Bonds issued by the top five hyperscalers – Amazon, Google, Meta, Microsoft and Oracle – were yielding roughly 0.6% more than other blue-chip peers in July with the same credit ratings and maturities, marking the widest risk premium of any sector in the investment-grade bond market according to Bank of America3.
Further confounding efforts to navigate today’s equity markets is what Matt King, former top analyst at Citi, calls a “structural slide towards lawlessness”4. “This isn’t just a political science observation, it’s an investment observation too”, he says. He sees the lack of effective government as the main source of the problem, which encourages voters to embrace a “strong man” to deliver results by bypassing Congress and ignoring laws. But what lawlessness is being referred to? The fact that the U.S. President earned more than US$1B in 2025 from digital currency interests, real estate and stock trades – all areas in which he oversees policy – may technically be above board from a legal perspective, but it certainly seems corrupt. Is that just the new normal that investors need to accept? After all, it seems various regulatory oversight agencies, such as the Securities and Exchange Commission (SEC), have been defanged. So, who’s going to stop him? Certain hedge funds certainly think investors should care about this, and they are engaging in tactics like copying the investments made by political elites, despite the associated risks. Certainly there could be tremendous upside by aligning yourself as such; however, if President Trump or any of the political elite being referred to fall from grace, the downside could be just as profound. In this environment, Matt King says investors should be wary of bonds, as their “floor” – or recovery rates – can be negatively impacted by political change or upheaval. If the rule of law breaks down, who’s to say that borrowers won’t become more lax with repaying their debts?
July also saw the release of data on business formation by the U.S. Census Bureau, and things looked great on the surface. Nearly six million small business applications were made in the U.S. last year, leading to enthusiasm around a potential small business boom and a renaissance in American entrepreneurialism. But, digging deeper into the data shows that only 1.7 million (less than 30%) of these were classified as “high propensity” businesses, meaning they intend to hire paid employees5. The vast majority don’t intend to hire anyone. “This isn’t a small business boom, it’s a side hustle economy dressed up in census language”, remarked Scott Galloway, Professor of Marketing at NYU. One interpretation of the numbers could be that they actually reflect something unhealthier about the economy. With one in three adults saying they intend to start a small business or side hustle in 2026, a 94% increase year-over-year, “is it entrepreneurial confidence or economic anxiety wearing a founder’s hoodie?”, he said.
Ruchir Sharma, Chair of Rockefeller International and regular contributor to the Financial Times, wrote another interesting article on July 27 entitled, “Why economic surveys have lost their relevance” 6. One aspect I’ve flagged in past comments, along with my confusion surrounding it, is the fact that consumers keep spending money, even as consumer sentiment is in the dumps. In fact, as his article points out, the gap between what they spend and the pessimism they express in surveys has never been wider. For those less familiar, there are two primary surveys that gauge how consumers feel about their financial situation, the state of the economy and the prospects for the future – one from the University of Michigan and another from the Conference Board. Recent readings from both surveys show we’re at levels typically seen in recessions, not steady expansions. Today’s levels have only been lower on two occasions in the past 30 years, including the 2008 financial crisis. But it’s not just consumer sentiment; it’s also business confidence. Ruchir puts forward his view that these surveys have largely become irrelevant for several reasons: falling response rates distorting findings, social media breeding discontent, and in a polarized world, partisan voters always thinking things are dismal when another party is in power. But what might be the most significant reason is that these surveys give every respondent an equal weight. But that sounds appropriate. What’s the issue? The issue is that, as written about before, the U.S. economy is not being driven equally by each person. In a K-shaped economy where the rich are doing well, and the poor are struggling, overall sentiment readings skew pessimistic. Why? Because the wealthiest 10% of Americans account for roughly 50% of consumer spending. So, whereas sentiment may have been an early indicator of past recessions, I for one will pay less heed unless the distribution of wealth in the U.S. changes dramatically. I’m not holding my breath.
Remember that Supreme Court decision that ruled President Trump’s sweeping “Liberation Day” tariffs were illegal? Isn’t it nice to have all of that tariff nonsense behind us? Oh, wait…
Wildfire smoke (yes, really) and Canada’s rebuke of punitive tariffs last year have irked the President enough to now threaten 50% tariffs on Canadian imports, while recently stating he “doesn’t care” about the USMCA (CUSMA) trade agreement that he originally signed during his first term in office. Despite the U.S. Supreme Court ruling, the President has found a loophole by way of Section 301 of the U.S. Trade Act of 1974. This section of the act does provide authority for retaliatory measures against unfair trade practices by foreign countries, so the administration has concocted claims that 60 of its trading partners are not being tough enough on forced labour. How altruistic. Say one thing about the President, say he’s all for fairness and equality. As it stands, Canada and Brazil seem to be the biggest potential losers of his new tariff threats, though the other 60 countries are potentially now on the hook for 10-12.5% tariffs.
Is there, perhaps, hope that the bond markets will save us from his instincts? Perhaps, less so, as some in the market now seem more nervous about what happens to the billions of dollars of expected government revenues if tariffs are not reimposed. One study found that last year’s tariffs added 0.7% to the Consumer Price Index (CPI, a broad measure of inflation)7. So, with a new slate of tariffs and an ongoing oil supply shock, it seems very reasonable to expect that inflation will persist and the U.S. Federal Reserve (Fed) will be forced to act (hike interest rates) in an upcoming meeting.
With regards to the oil supply shock and the ongoing tensions in the Middle East, recent reports indicate that U.S. strategic petroleum reserves now sit at roughly 300 million barrels, which is the lowest level in 40 years. The operational minimum is regarded to be between 180-200 million barrels, and if reserves fall below that level, future withdrawals risk damaging infrastructure and disrupting pipeline operations. Reserves fell in the third week of July by four million barrels, so these reserves certainly aren’t bottomless. As they continue to be drained, the U.S. is becoming increasingly vulnerable to future supply shocks, setting the stage for crude oil prices to rise significantly when the shielding effect of tapping inventories to meet demand is no longer a viable option8. If and when that happens, and oil prices for U.S. consumers REALLY increase, expect proverbial pitchforks and torches in the streets.
After a flat month of June for the Nasdaq 100 Index9, July saw the index briefly enter correction territory, down more than 10%, though it recouped some of the losses to end the month down 6.6%. As discussed last month, the Russell 2000 Index10 (small caps) benefitted from a rotation out of mega-cap growth stocks and economic momentum fueled by the AI infrastructure buildout. However, as Big Tech retraced, so too did Small Tech and the Russell 2000 Index, to the tune of -3.0%. It was China that topped the charts in July, based on improving investor sentiment, strength in their technology and AI-related stocks, and renewed foreign inflows into Chinese equities.
In Canada, the S&P/TSX Composite Index11 was amongst the best-performing indexes we track, based in part on resurgent oil prices. West Texas Intermediate (WTI) crude oil prices climbed from US$70 per barrel to over US$84 over the month, representing a 20% increase. Yet the price remains as fluid (pun intended) as the on-again-off-again tensions in the Middle East. At the time of writing, the price is back down to US$75. The Energy sector was up almost 7%, considerably outpacing the broad index return of 1.2%. Overall, it was a healthy month as nine of 11 sectors were up, with just Materials and Communication Services down more than 3% each and remaining amongst the laggards for the year. The top performing stocks in Canada over the month were Bausch Health Companies Inc (+38%, Healthcare), Mullen Group Ltd (+27%, Industrials) and Vermillion Energy Inc (+26%, Energy), while Blackberry Ltd (-33%, Technology), Hammond Power Solutions Inc (-28%, Industrials) and MDA Space (-28%, Industrials) led the way down.
In the U.S., the S&P 500 Index was essentially flat in July. Energy was the leading sector, up almost 13%, followed by Financials with a strong return of 6%, while Information Technology and Industrials were the main contributors to a weak month. Despite a negative month for the Information Technology sector, names within that sector represented some of the best and worst performers in the entire index. The best performing stocks were Cognizant Technology Solutions Corp (+43%, Technology), Accenture PLC (+35%, Technology) and PayPal Holdings Inc (+32%, Financials), while the worst performers (all of which are Information Technology names) were SanDisk Corp (-47%), Corning Inc (-46%) and KLA Corp (-39%). As for the recently hyped SpaceX IPO, a reminder that the offering price on June 11 was US$135/share and the initial trading price was US$150/share. It quickly shot above US$200/share in its first couple of trading sessions but closed out June at ~US$171 and fell precipitously in July, down to ~US$108 (a 37% decline).
From an equity factor standpoint, July saw Momentum reverse course in a big way. After climbing almost 8% in June, it ended July down 10%. Leading the charge were the Dividend and Value factors, up 3.5% and 3.3%, respectively.
On the currency side, the U.S. dollar declined by 1.5% vs. the Canadian dollar and fell 1.3% vs. a basket of global currencies.
Fixed income markets were largely negative across North America as bond yields moved higher. Persistent (and worsening?) inflation concerns, reduced interest rate cut expectations, and rising energy prices appeared to be the main drivers of the negativity in bond land. Longer-duration bonds underperformed shorter-duration bonds, while corporate credit outperformed government debt.
Yields increased in both jurisdictions across virtually all tenors, but markedly so in the U.S., with 30-year yields now around 5.2%, their highest level in almost 20 years.
Both the Bank of Canada (BoC) and the Fed held rates steady in July, so the target rate in Canada remains at 2.25%, and the target range in the U.S. remains between 3.50%-3.75%. It was Kevin Warsh’s second meeting as Fed Chair, and the central bank hinted that rate rises could come as soon as September, as a rapid rise in energy prices threatens to escalate into a broader bout of inflation. Looking at futures markets, investors are expecting just under two hikes by April 2027, compared to between 2-3 hikes before the Fed released its latest meeting statement. In that statement, they noted that economic activity was expanding at a solid pace, productivity growth and capital investment remained strong, and the unemployment rate was little changed; however, the personal consumption expenditures measure of inflation was 4.1% in May, more than double the Fed’s 2% target. On one hand, increasing interest rates to combat a supply shock (oil) may not necessarily seem the best course of action, yet things could easily spiral if the Fed sits on the sidelines too long while oil prices climb and eventually result in meaningful inflation in other areas of the economy.
1 The S&P 500 is an index of 500 stocks designed to reflect the risk/return characteristics of the large-cap US equity universe.
2 Vox Media, Prof G Markets Podcast, “Open AI Hits Pause on its IPO”, June 30, 2026.
3 Financial Times, “Doubts over AI’s profit outlook spur selling of long-dated debt”, July 11/12, 2026 Weekend Edition.
4 Financial Times, “Investing in an age of lawlessness”, July 4, 2026.
5 Vox Media, Prog G Markets Podcast, “How Big Tech Offloaded the Risk of AI”, July 27, 2026.
6 Financial Times, “Why economic surveys have lost their relevance”, July 27, 2026
7 Financial Times, “Trump rebuilds his tariff wall”, July 28, 2026
8 Financial Times, “Oil reserves at precariously low levels as US refineries boost output”, July 30, 2026
9 The Nasdaq-100 Index® includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization.
10 The Russell 2000® Index measures the performance of the small cap segment of the US equity market.
11 The S&P/TSX Composite Index is the benchmark Canadian index, representing roughly 70% of the total market capitalization on the Toronto Stock Exchange (TSX) with about 250 companies included in it.
This commentary is for general informational purposes only and does not constitute investment, financial, legal, accounting, tax advice or a recommendation to buy, sell or hold a security. It shall under no circumstances be considered an offer or solicitation to deal in any product or security mentioned herein. It is only intended for the audience to whom it has been distributed and may not be reproduced or redistributed without the consent of Guardian Capital LP. This information is not intended for distribution into any jurisdiction where such distribution is restricted by law or regulation.
The opinions expressed are as of the date of publication and are subject to change without notice. Assumptions, opinions and estimates are provided for illustrative purposes only and are subject to significant limitations. Reliance upon this information is at the sole discretion of the reader. This document includes information concerning financial markets that were developed at a particular point in time. This information is subject to change at any time, without notice, and without update. This commentary may also include forward-looking statements concerning anticipated results, circumstances, and expectations regarding future events. Forward-looking statements require assumptions to be made and are, therefore, subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. Investments in foreign securities involve certain risks that differ from the risks of investing in domestic securities. Adverse political, economic, social or other conditions in a foreign country may make the stocks of that country difficult or impossible to sell. It is more difficult to obtain reliable information about some foreign securities. The costs of investing in some foreign markets may be higher than investing in domestic markets. Investments in foreign securities are also subject to currency fluctuations. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed-income securities. Diversification may not protect against market risk and loss of principal may result. Index returns are for information purposes only and do not represent actual strategy or fund performance. Index performance returns do not reflect the impact of management fees, transaction costs or expenses. Certain information contained in this document has been obtained from external parties, which we believe to be reliable; however, we cannot guarantee its accuracy.
Guardian Capital LP is the manager and portfolio manager of the Guardian Capital Funds and Guardian Capital ETFs, with capabilities that span a range of asset classes, geographic regions and specialty mandates. Guardian Capital LP is an indirect, wholly owned subsidiary of Desjardins Global Asset Management Inc., which is part of the Desjardins Group. For further information, visit guardiancapital.com. All trademarks, registered and unregistered, are owned by Guardian Capital Group Limited and are used under license.
Published: August 10, 2026
Please note that for certain documents provided on this webpage, accessible formats can be made available, free upon request, from Guardian’s Human Resources department.
You may contact us via telephone, e-mail or in writing at:
Human Resources
Guardian Capital Group Limited
Commerce Court West
199 Bay Street, Suite 2700, P.O. Box 201
Toronto, ON M5L 1E8
Phone: 416-364-8341 | 1-800-253-9181
Email: hr@guardiancapital.com
