End-of-Summer Market Update - Balance Over Bias

As summer winds down and we head into the final stretch of 2026, I wanted to share a few thoughts on where markets stand — along with some helpful context from our partners at Manulife Capital Markets.

The short version: corporate earnings remain strong, market performance is broadening beyond the “Magnificent 7,” and bonds are paying more income than we've seen in years — though duration still matters. Geopolitics, inflation, and central bank direction remain the wildcards heading into fall.

Here's a closer look.

Where things stand

We're approaching the end of the “dog days of summer” — a stretch traditionally associated with the hottest days of the year. The phrase traces back to ancient astronomy and Sirius, the “Dog Star,” the brightest star in the constellation Canis Major. Ancient observers noticed Sirius rising alongside the sun in mid-to-late summer and believed its brilliance added to the season's heat.

In a sense, today's equity markets feel just as scorching. If there's a modern-day Dog Star for investors, it may well be artificial intelligence — one of the brightest and most influential themes driving markets higher this year.

Like a warm summer season, strong equity markets are meant to be enjoyed. Occasional storms may appear on the horizon, but that's a natural part of any season — these periods of turbulence tend to be temporary and have historically given way to clearer skies. Summer eventually turns to autumn, but the opportunities created by innovation, economic resilience, and corporate growth can endure well beyond a single season.

The second half of the year isn't likely to be a simple choice between optimism and caution — it's more about balance. Equities still have real support from earnings, AI-related investment, and resilient economic growth. At the same time, elevated valuations and concentrated market leadership argue against complacency. Fixed income is offering better income than in the past, but managing duration carefully still matters while inflation and central bank policy remain uncertain.

Our approach: stay invested, stay diversified, and focus on quality companies and quality income — rather than chasing the most crowded corners of the market.

July in review

July was a good reminder that strong fundamentals don't always mean smooth sailing. A few highlights:

•      The macro picture is constructive, if complicated. U.S. GDP growth came in below expectations, but the underlying details were solid — consumer spending and business investment stayed strong. Canada's economy showed its second straight month of growth in May, beating forecasts.

•      Earnings are still the market's main support. Second-quarter S&P 500 earnings growth is tracking well ahead of expectations. Even excluding some one-time gains at a couple of mega-cap companies, underlying earnings growth is running at its fastest pace since 2021 — but the market has been selective, rewarding companies with real AI monetization and punishing vague guidance.

•      The AI trade broadened, corrected, then stabilized. The conversation has shifted from “will companies keep spending on AI?” to “which companies can actually generate a return on that spending?”

•      Canada held up well, helped by energy sector strength and improving economic data, even as Canadian bonds faced pressure from renewed inflation concerns.

•      International markets remain a valuable diversifier — Japan continues to benefit from wage growth and corporate reform, Europe is showing improving earnings breadth, and emerging markets have been more uneven, particularly in semiconductors.

What we're watching into year-end

•      Inflation follow-through — is disinflation durable, especially in services, shelter, and wages?

•      Central bank communication — more clarity is needed on what would trigger the next move from the Fed and Bank of Canada.

•      Earnings breadth — a more durable market advance likely needs participation beyond mega-cap tech.

•      AI return on investment — which companies can turn AI spending into profit, heading into 2027.

•      Oil and geopolitics — energy prices remain a swing factor for inflation and sentiment.

•      Credit conditions — spreads are tight, which is supportive for now but leaves less room for disappointment.

•      Canada–U.S. trade — tariffs and trade policy remain important variables for Canadian growth.

As always, we're happy to walk through what this means for your specific portfolio — reach out any time to set up a review.

Wishing you a great close to summer!

Roger Banks

Banks Financial