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5 minutes to read by Eric Savoie, CFA, CMT, Senior Investment Strategist Sep 2, 2026

The global economy has been resilient and leading indicators of growth suggest the expansion has room to run (Exhibit 1). Activity has been supported in part by the massive AI infrastructure investment and fiscal stimulus while AI-related productivity gains are also proving helpful. On the flip side, the war in Iran and associated energy shock is lingering, and new tariffs present another headwind – although these forces, in our view, are not strong enough to topple the economy into recession. We look for a solid economic expansion over this year and next, and our global growth forecasts are slightly above the consensus.

Exhibit 1: Global purchasing managers’ indices

Multi-line chart tracking four global manufacturing purchasing managers' indices (JP Morgan Global, U.S. ISM, China, and Euro Area) from 2008 to August 2026. All four PMIs have rebounded above the 50-expansion threshold as of August 2026, ranging from 51.5 (China) to 54.6 (U.S.), supporting the view that the global economy continues to expand despite the lingering Iran war energy shock and new tariffs.

Note: As at August 31, 2026. Source: Macrobond, RBC GAM

Inflation pressures persist

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On the inflation front, a combination of forces is keeping price pressures elevated. Supply chains have been disrupted by the Strait of Hormuz closure, tariffs raise the costs of goods and services, and the surge in AI demand is pushing up prices of ingredients needed for the AI build-out – and impacting consumer products as well. U.S. consumer price inflation was at 3.4% in July and remains too high relative to the 2.0% level targeted by central bankers, although we expect that price pressures will eventually moderate into 2027 as some of these upward forces on prices subside (Exhibit 2).

Exhibit 2: U.S. inflation measures

Multi-line chart tracking U.S. inflation measures - headline CPI and core CPI - from 1996 to July 2026, shown alongside the Fed's 2% target. Both measures surged to multi-decade highs in 2022 before easing, with headline CPI at 3.4% and core at 2.5% as of July 2026 - both still above target, reflecting persistent price pressures from the Strait of Hormuz closure, tariffs, and surging AI demand.

Note: As of July 31, 2026. Source: Bloomberg, RBC GAM

Central banks shift to tightening mode

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Against this backdrop, central banks are pivoting away from stimulus toward more restriction, and interest rates have already begun to rise in some regions (Exhibit 3). The European Central Bank (ECB) and Bank of Japan (BOJ) each raised their respective policy rates by 25 basis points in June and indicated that more tightening could be coming. In the U.S., newly appointed Fed chair Kevin Warsh has reiterated his commitment to bring inflation back down to the 2.0% target and that, with the labour market in solid position, focus should be on addressing inflation. Investors are looking for higher rates ahead, with the futures market is pricing in two 25-basis-point hikes in the U.S. by the spring of 2027.

Exhibit 3: Central bank policy rates

Multi-line chart tracking central bank policy rates for the U.S. Federal Reserve, Bank of Canada, and ECB from 2000 through 2027 forecasts. After aggressive tightening cycles pushed U.S. rates to roughly 5.3% and the ECB to 4.0% in 2022–2024, rates began easing in late 2024–2025, but the forecast (dotted lines) shows them shifting back upward - with the U.S. expected to settle around 4.0–4.2% and the ECB and Canada around 3.0% by 2027, reflecting the pivot toward further tightening amid persistent inflation.

Note: Forecasts, shown as dotted line, are based on futures for the U.S. and OIS forwards for other regions. As of August 31, 2026. Source: Bloomberg, RBC GAM

Rising bond yields reduce valuation risk

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Bond yields climbed in all major regions over the past quarter as investors factored in stubborn inflation, large government deficits, and unexpectedly high corporate issuance of debt by hyperscalers. The U.S. 10-year yield climbed as high as 4.75% during the quarter, up from 4.44% at the end of May, and is now situated well above our modelled estimate of equilibrium (Exhibit 4). While further concerns around U.S. fiscal health and firmer consumer prices could push bond yields higher in the near term, we note already attractive real rates, especially if inflation ultimately moderates over the medium term as we expect.

Exhibit 4: U.S. 10-year T-bond yield

Equilibrium range
Line chart tracking the U.S. 10-year Treasury yield from 1980 through 2033 forecasts, shown alongside a modelled equilibrium range. After peaking near 16% in 1981 and declining for decades to below 1% around 2020, yields have surged back to 4.75% - now sitting above the current equilibrium range. Ultimately, reflecting the recent climb driven by stubborn inflation, government deficits, and heavy corporate debt issuance.

Note: As of August 31, 2026. Source: RBC GAM

Stocks make new highs despite AI volatility

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In equity markets, stocks extended their gains to fresh records after a volatile summer in which certain groups of stocks experienced great volatility. While major indices appeared relatively calm, leadership shifted violently between semiconductors, hyperscaler and software companies as investors debated the winners and losers of the AI theme. Overall, though, stocks marched higher and, as of the end of August, most major indices have delivered double-digit gains year-to-date, with emerging market equities in the lead with a 26% gain so far this year (Exhibit 5). Following these strong gains, our global stock-market composite is situated 14% above fair value, reducing future return potential (Exhibit 6). This places greater dependency on further strong earnings growth to sustain the bull market particularly as higher yields could compress valuations.

Exhibit 5: 2026 year-to-date performance

Total returns, in CAD
Bar chart showing 2026 year-to-date total returns across asset classes (in CAD). Equities dominated with double-digit gains across the board, led by MSCI Emerging Markets at +25.6% and MSCI Japan at +22.4%, while fixed income lagged with 7-10Y US Treasuries and US Investment Grade the only negative performers.

Note: As of August 31, 2026. Returns based on various ETFs and official indices. ETFs used are as follows: CAD Cash (CBIL), 7-10Y US Treasuries (IEF), US High Yield (HYG), U.S. Inv. Grade (LQD). Source: Bloomberg, RBC GAM

Exhibit 6: Global stock market composite

Equity market indexes relative to equilibrium
Area chart tracking the global stock market composite's valuation relative to equilibrium from 1980 to 2026, comparing global equities and global ex-U.S. equities as a percentage above or below fair value. Global equities currently sit 14.1% above fair value - below the cycle high of 28.0% in December 2021 but still elevated - while global ex-U.S. equities remain slightly undervalued at -2.0%, reflecting U.S.-driven overvaluation and reduced future return potential.

Note: As of August 31, 2026. Source: RBC GAM

Earnings boom driven by AI spending and energy gains

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Supporting high equity-market valuations is the fact that corporate profit growth has been extraordinary and much better than expected. At the beginning of the year, analysts looked for S&P 500 earnings to grow by 15% in 2026, but that figure has since swelled to 34% as companies consistently beat estimates and raised forward guidance (Exhibit 7). Earnings have been boosted in large part by substantial increases to AI capital spending plans, improving profit margins and by surging oil prices that boosted energy companies’ bottom lines (Exhibit 8). The test for the profit outlook going forward will be whether substantial AI investment, which has raised profits in the near term, translates to durable revenue from end-user demand. Early signs of enterprise AI adoption are encouraging, but the profit outlook would be vulnerable if AI demand ultimately underwhelms.

Exhibit 7: S&P 500 Index

Consensus earnings estimates
Multi-line chart tracking consensus earnings estimates for the S&P 500 across forward years 2024 through 2028, from 2022 to late 2026. The 2026 estimate has surged from roughly $290 in early 2024 to approximately $358, reflecting the upgrade from an expected 15% growth rate at the start of the year to 34%, driven by ramped AI capital spending, improving margins, and surging oil prices boosting energy profits.

Note: As of September 2, 2026. Source: Bloomberg, RBC GAM

Exhibit 8: S&P 500 Index

Net margin
Line chart tracking S&P 500 net profit margins from 1980 to 2026, shown against a long-term linear trendline and a forward consensus estimate. Margins have expanded steadily over decades from under 6% to over 13%, with the 2026 consensus estimate projecting a sharp acceleration to roughly 16.5% - well above the long-term trend.

Note: As of August 2026. Source: Bloomberg, RBC GAM

Asset mix: maintaining near-neutral asset mix, with slight overweight in stocks

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Our asset mix considers a variety of scenarios around our base case and balances the risks as well as the potential rewards. Our central scenario is for the economy to continue expanding at a moderate pace and for inflation to eventually ease toward central bank targets sometime next year. In this environment, we expect only little change in yields from here, unlikely to cause significant losses for government bonds. As a result, we look for low to mid-single digit gains on government fixed income, with slightly higher return potential in corporate bonds while acknowledging that historically narrow risk premiums don’t support substantial risk taking in credit markets. Stocks have enjoyed powerful gains and valuations reflect heightened investor optimism about a positive outlook. We are maintaining only a slight overweight in stocks, with modest regional tilts in favour of North America and Asia, versus a slight underweight exposure to Europe and a neutral position in emerging markets. This positioning is unchanged from a quarter ago, and our current recommended asset mix for a global balanced investor is 61.0% equities (strategic: “neutral”: 60%), 37.5% bonds (strategic “neutral”: 38%) and 1.5% in cash (Exhibit 9).

Exhibit 9: Recommended asset mix

RBC GAM Investment Strategy Committee
Three donut charts showing the recommended asset mix for a global balanced investor as of September 2026: equities at 61.0% (slightly overweight the 60% strategic neutral), fixed income at 37.5% (slightly underweight the 38% neutral), and cash at 1.5% (underweight the 2% neutral), reflecting a near-neutral stance with a slight overweight to stocks.

Note: As of September 1, 2026. Source: RBC GAM

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Date of publication: Sep 2, 2026

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