Macro Musings: Tailwinds and Tightropes – January 2026

(performance data as of December 31, 2025)

The Quick-Hits

• Excellent 2025 for global equity markets with Canada near the top, U.S. far behind
• Ex-U.S. exposure paid off in 2025, but tailwinds for the U.S. are still likely strong in 2026
• Canadian bond returns muted as Bank of Canada now likely on pause with rate cuts
• More U.S. rate cuts expected, but 2026 likely more of a “coupon-clipping” year
• Quote(s) of the month:
  

  “Every Wall Street Analyst Now Predicts a Stock Rally in 2026.”
  – Bloomberg News headline from December 29, 2025

Macro Musings

Happy New Year! I hope everyone had a nice holiday break with friends and family and closed out 2025 on a high note. Markets certainly did! For us Canadians, it was a year of increased patriotic fervour despite tariff pressures leading to dampened expectations for Canadian stocks. In almost poetic fashion, the S&P/TSX Composite Index¹ said, “Hold my beer,” and went on to deliver almost 32%, marking its best year since 2009 and making Canada one of the best-performing countries in the developed world in 2025.

Our neighbours to the south saw their market (S&P 500 Total Return Index²) climb nearly 18% (USD) and, as we look forward to 2026, most of Wall Street expects double-digit gains yet again for U.S. stocks. According to a December 5, 2025, article in the Financial Times³, a survey of nine major investment banks showed expected returns of 10% for the year to come. Support is expected to come in many forms – fiscal stimulus through tax breaks, monetary stimulus through interest rate cuts, regulatory stimulus in the form of removing business impediments as well as continued support from Artificial Intelligence (AI), all expected to push the index higher.

Deutsche Bank was the most optimistic of the group, forecasting the S&P 500 Index would reach 8,000 by year-end (it closed out 2025 at 6,845). Binky Chadha, Deutsche Bank Securities Chief U.S. Equity and Global Strategist, said he expects strong corporate earnings early in 2026 to boost returns and also predicted that we’d see a broadening out of returns beyond Information Technology. “Everyone characterizes my forecast as bullish”, he said, “I’m concerned it’s not bullish enough.” At the other end of the spectrum, we saw Bank of America putting out the most conservative forecast of the group, projecting the S&P 500 would reach just 7,100. Their rationale was that we were likely to see a turbulent year and warned that the effects of AI spending and the data-center build-out were yet to emerge in improved earnings. While 2025 certainly favoured non-U.S. investment exposure, this same group of investment banks expects European equities to lag the U.S. this year with an average return estimate of 6.4%.

Outside of that group of investment banks, another Financial Times article⁴ reported that the Bank for International Settlements⁵ (BIS) was warning of bubble risk in both gold and U.S. stocks. According to the BIS, retail investors have been helping to drive gold and U.S. stocks towards bubble territory, raising the risk of a disorderly reversal. Over the past three months, BIS reports that institutional investors kept their gold exposure flat and scaled back their U.S. equity exposure, with retail investors accounting for the bulk of inflows into both asset classes. The growing role of retail investors could, in their view, “threaten market stability down the road, given their propensity to engage in herd-like behaviour, amplifying price gyrations should fire sales occur.”

Within U.S. equity markets, “concentration risk” was certainly top of mind for most investors in 2025, and that doesn’t appear to be abating as we open the page on a new year. In December, the weight of the Information Technology sector as a proportion of the S&P 500 Index rose to a new record, breaking through the 35% threshold that was set at the peak of the dotcom bubble in the early 2000s. AI has obviously been at the epicentre of this growing weight, and the “Architects of AI” were featured as Time Magazine’s person(s) of the year. Some contrarian traders actually point to the likes of Time Magazine, The Economist and Barron’s covers as indicators suggesting someone or something has reached peak popularity. The thinking is that by the time that person or thing makes it onto such a cover, they (or it) are so mainstream, and public enthusiasm is so overwhelming, that a reversal of some kind is due.

While AI was the dominant theme and discussion point of 2025, “tariffs” and “inflation” had far more than their fair share of time in the limelight. Many people were catastrophizing over both earlier in 2025, speculating on how much the former would spike the latter.

In a recent interview⁶, Justin Wolfers, Professor of Economics at the Gerald R. Ford School of Public Policy at the University of Michigan, summed things up very well. His remarks centred on how tariff-fueled inflation is fundamentally different from the usual inflation we tend to see. When we observe demand-driven inflation, we see prices go up. For workers, whatever the company is producing that just went up in price, also makes the employee more valuable and, as a result, is likely to see a salary increase sometime soon, to keep pace with the inflationary prices. When it’s tariff-related inflation, costs for the company have just gone up, but whatever is being produced didn’t get more valuable; then the company really has no reason to increase employee pay. So, prices go up, but salaries don’t catch up. Wolfers’ view is that the tariffs we see in place now aren’t going to cause hyperinflation. Rather, he believes they’re going to cause prices to continue to rise without wages keeping up, which will be immensely more painful. Such an environment fundamentally undermines real wages, quality of life, and what you can afford… forever (or for as long as the tariffs remain in place). The effects will be small and persistent. He concludes by saying that the Trump administration’s approach to imposing these tariffs is “a pointless policy mistake that is expensive, but probably not prohibitively so” and that much of the damage being done by the Trump administration to the U.S. economy and to the U.S.’ standing in the world likely won’t fully be felt during Trump’s lifetime.

On the markets front, the White House would point to the U.S. stock market and congratulate itself on a job well done. By historical standards, 2025’s return of almost 18% is 1.5x better than the average return of 12% over the past 50 years. Amazing, right? Only if you don’t consider how the rest of the world’s stock markets performed…

Equities

Of the major indices we track, Canada topped the charts with a return of 32%, ranking seventh amongst the 23 constituent countries in the MSCI World Index⁷. Beating Canada this year (based on MSCI country indexes) were Spain (61%), Austria (57%), Ireland (39%), Finland (39%), Italy (37%) and Hong Kong (35%). You’d need to go down to the 17th spot to find the MSCI USA Index⁸ at just 17%, beating only six other countries – or five if you remove Denmark from the list, which was the worst performer due to Novo Nordisk representing over 40% of that index and which had a rough year. To put the relative underperformance of the U.S. market into clearer perspective, the S&P 500 Index undershot the MSCI All Country World ex U.S. Index⁹ by the widest margin since the global financial crisis. While investors are less likely to complain about an almost 18% absolute return, those who bought into the theme of diversifying beyond the U.S. earlier in 2025 would have been rewarded.

Without a specific catalyst to really derail the momentum of AI and AI-adjacent tech stocks, it appears that 2026 should favour the U.S. over international exposure, based on the previously mentioned stimulus measures likely to be deployed, particularly as the U.S. midterms approach and the current Administration may try to pull out all the stops to see if they can avoid a Democratic wave.

In Canada, the extent to which the market in 2026 may shape up in a similar fashion to 2025 is largely going to hinge on commodity prices (namely gold) continuing to see increased demand.

The Canadian Materials sector was up over 100% for the year – by far the best-performing sector (next best was Financials, up 35%). With the commodity wave in full effect, it’s no surprise to see that gold companies dominated the best-performing stocks in our domestic index for 2025. Lundin Gold Inc. took the top spot, up 291%, followed by New Gold Inc. (+233%) and OceanaGold Corp (+228%). Outside of the Materials sector though, several other Canadian stocks that eclipsed the 100% return mark for the year, including Celestica (Information Technology, +208%), Energy Fuels Inc (Energy, +169%), Bombardier (Industrials, +139%), Sprott Inc (Financials, +127%), Aritzia (Consumer Discretionary, +120%) and Badger Infrastructure Solutions (Industrials, +107%).

In the U.S., the top three stocks in the S&P 500 all came from within the Information Technology sector. Western Digital Corp. took the top spot, up 306%, followed by Micron Technology (+240%) and Seagate Technology Holdings PLC (+225%). Other notable high-flyers included Newmont Corp (Materials, +173%), Warner Bros. Discovery (Communication Services, + 173%), Lam Research Corp. (Information Technology +139%) and Palantir Technologies Inc. (Information Technology +135%).

From a stylistic perspective, Momentum, Growth and Value finished 2025 in that order and within a fairly tight band, each delivering between 18-19%, followed by Dividend and Quality, both up a little over 14%. With Growth stocks increasingly driving U.S. and global markets, it’s perhaps less surprising (but still interesting) that global stock dividend yields are now sitting at a two-decade low of just 1.6%¹⁰. For older investors seeking cash flow, this could be why covered call strategies have exploded in popularity, providing solutions for investors to enhance their income-earning potential beyond simply dividend yields and, often, delivering yields that even outpace high-yield bond strategies.

With regards to the Canadian dollar (CAD), it appreciated by 4.5%, or about three pennies over the year, closing out 2025 worth US$0.7286. Gold prices surging and expectations for rate cuts from the U.S. Federal Reserve (Fed) (which makes our relative interest rate more attractive and thus increases the demand for Canadian dollars by foreigners) in 2025 helped push the Loonie higher. With regards to Gold, the price climbed by a staggering $1,750 per ounce during the year, closing at $4,371 and marking an appreciation of 67% (in USD terms).

Fixed Income

Each of the main fixed income indexes we track finished 2025 in positive territory, with U.S. bonds generally outperforming their Canadian counterparts by a considerable margin. Unfortunately, December was a poor month for domestic bond markets, with the FTSE Canada Universe Bond Index down 1.3%, resulting in a return for the year of just 2.6%. The decline in December reflected an upward adjustment of policy interest rate expectations against persistent and sizable upside surprises in the Canadian economic dataflow — the market is now pricing in better than even odds of a rate hike by the end of this year.

Our view of 2026 hasn’t really changed relative to what we wrote about last month. To reiterate, we believe it’s going to be more of a coupon-clipping year rather than one in which bond investors are likely to realize much in the way of capital gains. Why? First, because the Bank of Canada (BoC) appears done with interest rate cuts and, second, corporate bond spreads are near historically tight levels, so there’s an asymmetrical skew to the risk of widening spreads from here. There is, perhaps, an opportunity for capital gains from U.S. bonds with duration exposure (i.e. aggregate bond type strategies); however, one should be reminded that capital gains stemming from interest rate cuts are based on expectations rather than the cuts themselves. In other words, if you believe that the Fed will be more aggressive in cutting rates than what most people believe today, you could be rewarded for increasing your exposure. The flip side is also true, though. If people today are overly aggressive in their expectations for rate cuts which don’t actually materialize, aggregate bond exposure will likely face headwinds (perhaps even capital losses). On the government bond side, levers exist to add alpha by tactically deploying between Provincial and Federal bonds as well as determining where along the yield curve to obtain duration exposure. Similarly, on the corporate side, while spreads in aggregate may be tight, there is a wide dispersion of quality and opportunities to sift through.

Barring any major changes or shocks to the economy, our fixed income team’s base case assessment for 2026 is one of economic expansion that should favour corporate bonds over government bonds.

As mentioned, the BoC decided to keep rates at 2.25% at their December meeting, as was universally anticipated by both forecasters and markets. Officials reiterated that any future moves would depend on incoming data, particularly inflation and growth trends. Regarding inflation, they noted that it’s hovering near their 2% target, but risks remained balanced. On the growth side, they see it as resilient, supported by consumer spending and business investment. They also acknowledged divergence with U.S. monetary policy (the Fed is still in cutting mode) but stressed that Canadian conditions warranted a different approach. As of writing, the market is currently expecting better than even odds for Canadian interest rates to rise slightly (perhaps one hike) before the end of the year.

In the U.S., the Fed cut rates by 0.25% at its third consecutive meeting, putting the target range at 3.50-3.75%. Despite the resumption of the cutting trend, the meeting did highlight uncertainty and dissent within the policy-setting Federal Open Market Committee, with the decision to cut passing with a 9-3 vote. While Trump acolyte Stephen Miran once again voted for a 0.50% cut instead, two other members called to keep rates unchanged. Notes from the meeting indicate the group was deeply split on whether inflation or labour market weakness posed a greater risk. The market currently expects at least two more rate cuts in 2026.

With regards to the yield curve, both Canada and the U.S. experienced a significant steepening throughout 2025, a stark difference from what was seen over the previous three years. In other words, longer maturities (more duration) mean more yield across the curve. Cash and short-term bonds no longer offer the asymmetrical opportunity for more yield with less risk that they did recently. Over the month, yields rose materially over all tenors in the wake of the BoC’s decision to pause rate cuts. Again, because investors were expecting more rate cuts, they drove bond prices too high. With the BoC now likely done cutting rates, these bond prices had to recalibrate lower (driving yields higher, which are inversely correlated to bond prices). In the U.S., the Fed’s rate cut brought short-term yields down, but longer-dated bonds saw yields increase.

U.S. high yield spreads over Treasuries tightened slightly in December, closing out the year at 281 basis points. Despite the significant spike in spreads we saw in the spring of 2025, centered around ‘Liberation Day’ tariff unease and uncertainty, the elevated levels proved to be short-lived, thanks to the Administration backpedaling on their aggressive and indiscriminate tariff rates. While there were trading opportunities to deploy capital as spreads widened, the year-over-year change in spreads of just 11 bps (tighter) likely surprised investors. Many were probably not expecting to see this sort of resilience from corporate America, with spreads tightening further from already low levels.

Coming up…

In our latest episode of the Buy the Way podcast, David Onyett-Jeffries and I look back at key market drivers over the year and what could shape 2026. From AI-fueled rallies and Big Tech risks to political moves ahead of U.S. midterms, we explore scenarios for equities, bonds, and global markets. Plus, quick portfolio positioning ideas and surprising holiday spending stats.

Also – stay tuned for an invitation to a webinar on January 22, to hear from Michael Hughes of GuardCap Asset Management, a sub-advisor to Guardian Capital LP, where he’ll share the team’s views on why they maintain conviction in their global equity holdings, why they believe earnings matter more than ever and how they see market dynamics evolving.

Thanks as always for your attention. Have an excellent start to the year!

John Pagliacci
Vice President, Investment Programs and National Accounts | Guardian Capital LP
John Pagliacci is Vice President, Investment Programs and National Accounts for Guardian Capital LP. He contributes to strategic planning for the Canadian retail asset management business, including product strategy and development, overall sales enablement initiatives and serving as a brand ambassador.

David Onyett-Jeffries
Vice President, Economics & Multi Asset Solutions | Guardian Capital LP
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP). He provides macroeconomic guidance to GCLP and its affiliates. Additionally, he is a portfolio manager of GCLP’s multi-asset portfolios and funds and works closely with GCLP’s Directed Outcomes team.

¹ 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.
² The S&P 500 is an index of 500 stocks designed to reflect the risk/return characteristics of the large-cap US equity universe.
³ Financial Times, US stocks set for double-digit gains in 2026, say Wall Street banks, Rachel Rees and Jonathan Vincent, December 5, 2025
⁴ Financial Times, Retail investors help drive gold and US stocks to bubble territory, BIS warns, Leslie Hook and Martin Arnold, December 8, 2025, https://www.ft.com/content/8e5a4fcf-dc99-4014-853a-b2585e2396b9
⁵ The Bank for International Settlements (BIS) supports central banks’ pursuit of monetary and financial stability through international cooperation and acts as a bank for central banks.
⁶ Vox Media, Prof G Markets podcast, The Biggest Disruption is Yet to Come – ft. Justin Wolfers, December 19, 2025, https://www.youtube.com/watch?v=xA9nRaI71dw
⁷ The MSCI World Index captures mid- and large-cap representation across 23 developed market countries.
⁸ The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the US market. With 627 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.
⁹ The MSCI World ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets DM countries*–excluding the United States. With 776 constituents, the index covers approximately 85% of the free-float-adjusted market capitalization in each country.
¹⁰ Bloomberg, based on the net aggregate dividend yield of the MSCI All Country World Index as of December 2025.

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Published: January 9, 2025