Q2 2026 market update

Global equity markets delivered strong returns over the quarter as the U.S. and Iran spoke about a peace deal, while enthusiasm for the potential of artificial intelligence continued. Still, investors showed some concern over geopolitical issues, higher inflation and slower economic growth. Canadian and U.S. equity markets finished higher, reaching new record highs along the way. Companies continued to deliver strong earnings growth, lifting sentiment towards the Canadian and U.S. economies and financial markets.

• Canada’s economy under pressure
  • Canada’s gross domestic product unexpectedly shrank over the first quarter of 2026, as reported in the second quarter.
  • Exports declined as trade tensions with the U.S. continued. Business and government spending also dropped.
  • Conversely, household spending rose, showing households’ resiliency before tensions in the Middle East heightened.
• Global inflation rates picked up during the quarter
  • The conflict in the Middle East persisted, keeping the Strait of Hormuz effectively closed over much of the quarter.
  • This hindered the global supply of oil and kept oil prices high. Inflation rates, including in Canada and the U.S., surged higher.
  • Near the end of the quarter, oil prices dropped in response to the U.S. and Iran reaching an interim peace deal as they continue to negotiate.
  • The deal reopened the Strait of Hormuz.
• U.S. consumer confidence drops
  • Measures of U.S. consumer confidence dropped sharply over the quarter.
  • U.S. consumers expressed concerns about higher prices, the economy and their personal financial situation.
  • Trade tensions and the conflict in the Middle East cast a shadow over the U.S. economy.
  • The U.S. Federal Reserve Board (Fed) held its policy interest rate steady over the quarter.

Attention stuck on geopolitical issues

Geopolitical tensions continued to be a key theme for global financial markets over the second quarter of 2026. Concerns about inflation, global economic activity and financial markets eased as the U.S. and Iran worked towards a peace deal.

Over much of the quarter, investors were optimistic the two sides would reach a peace deal after agreeing to a ceasefire as they negotiated conditions for a peace agreement. Near the end of the quarter, the U.S. and Iran reached an interim peace deal, which included the reopening of the Strait of Hormuz with no tolls for 60 days and a commitment to keep negotiating.

While geopolitical tensions were impacting Canada’s economic strength, Canadians were also focused on trade negotiations with the U.S. and Mexico. All three countries were at the negotiating table as the Canada-United States-Mexico Agreement (CUSMA) was up for review by July 1, 2026, where it could be extended for 16 years or with annual reviews.

How are large economies doing?

• The U.S. economy grew at an annualized pace of 2.1% in the first quarter of 2026 (as reported in the second quarter).
• China’s economy grew by 5.0% year-over-year.
• Europe’s economy shrank by 0.2%.
• The U.K. economy grew by 0.6%.
• Japan’s economy expanded by 1.8%, annualized.

Source: Bloomberg Finance L.P.

Equity markets rise

• Global equity markets rose over the quarter.
• North American equity markets reached new record highs during the quarter.
• Equities in Canada, the U.S., Europe, China, U.K., Japan, EAFE and emerging markets increased. Your portfolio may have benefited from stronger equity markets.
• Global bond prices moved higher while bond yields increased slightly. Fears of higher inflation raised concerns that central banks could lift interest rates. Global bond investors continue to earn higher income than they did before the COVID-19 pandemic.
• Canadian bond prices increased slightly while bond yields declined.
• The price of oil declined as the U.S. and Iran worked towards a peace deal. The Strait of Hormuz reopened near the end of the quarter after the U.S. and Iran reached an interim peace deal with a commitment to continue negotiations.
• The price of gold finished lower over the quarter.

Source: Bloomberg Finance L.P.

Global inflation rates accelerate

Markets had expected global inflation to be largely contained in 2026, which may have prompted central banks to consider lowering interest rates further. However, the conflict in the Middle East pushed up oil prices, leading to a rise in inflation rates around the world. Markets began to consider whether central banks would eventually need to raise interest rates in response to soaring inflationary pressures. Major central banks, such as the Bank of Canada (BoC), the Fed and the Bank of England, all held their policy interest rates steady over the quarter. Meanwhile, the European Central Bank and Bank of Japan lifted their policy interest rates near quarter-end.

Source: Bloomberg Finance L.P.

How is Canada’s economy doing?

Canada’s economy shrank over the first quarter of 2026, feeling the impact from ongoing trade tensions and higher energy prices at the onset of the Mideast conflict. Household consumption was relatively strong over the first quarter but pulled back in the second quarter as higher oil prices impacted discretionary spending. Canadian lawmakers continued to have discussions with the U.S. and Mexico on the review of CUSMA.

• Canada’s economy shrank by 0.1%, annualized, over the first quarter of 2026.
• Business and government spending fell.
• Exports also declined amid ongoing trade tensions with the U.S.
• Conversely, household consumption increased over the quarter, suggesting Canadian households were in a relatively strong position before the conflict in the Middle East sent energy prices soaring.
• Canada’s unemployment rate was 6.6% in May, down slightly from 6.7% at the end of the previous quarter.
• Canada’s inflation rate was 3.2% in May.
• Canadian equities moved higher over the quarter. The Financials and Health Care sectors were the strongest performers. The Materials sector posted the largest decline.
• The yield on the benchmark 10-year Government of Canada bond decreased to 3.38% at the end of the quarter from 3.47%. Canadian bonds continue to deliver relatively strong income to investors.

Source: Bloomberg Finance L.P.