Eric Lascelles - Managing Director, Chief Economist and Head of Investment Strategy Research

Hello and welcome. My name is Eric Lascelles. I'm the chief economist and head of investment strategy research for RBC Global Asset Management. And very pleased to share with you our latest monthly Economic Webcast for the month of September 2026. And as you can likely see in front of you, the title of this particular iteration is Tariffs and rising yields.

And those aren't the only things that matter in markets and to the global economy right now. But they certainly are important and fresh developments. And so of course, the rising tariffs between the U,S. and Canada, which we'll get to, and also somewhat rising bond yields and some concerns about that, and indeed a U.S. Treasury Department effort to constrain those rising yields.

Report card: And so we'll talk about that and indeed much more as this report card will convey. And so let's start, as we often do, on the positive themes side of the ledger. We’ll celebrate some good things going on before we get into the gory details of what's not going quite so well. And fundamentally and critically importantly, the global economy is proving resilient.

It is still very much growing, and growing at a pretty decent rate, we would say. And as we gaze forward into 2027, we still see some fairly important tailwinds that can remain supportive. So we think that growth can persist into next year. We've recently rerun our business cycle scorecard and it has landed upon a mid-cycle or perhaps late cycle type of conclusion.

And that might not seem like something worth celebrating. In fact, it sounds as though perhaps the cycle is nearing an end. But I would say that's actually a pretty good place to be.

Yes, it's not the start of a brand-new cycle. We shouldn't necessarily assume ten years of happy, rapid economic growth ahead, but mid- to late-cycle would suggest a number of years of expansion are left.

And, you know, at times, as we've seen some challenges in the world, you'd be nervous perhaps that it would be less than that. So we view that as a win and as a signal that we should indeed be expecting economic growth over the next few years. And as it happens, when we talk about that anticipated economic growth, we are still, for the most part, a little bit above the consensus.

We have growth forecasts that are slightly faster than the market is thinking. That's hardly the only thing of relevance to markets, I should emphasize. But nevertheless, that's a small positive in terms of the potential for risk assets to perform well going forward.

What about the things that aren't so good? Well, let's talk negative themes now. And so one very much is rising yields.

And that's been true now for a number of years. It's certainly been true since this summer. And it's been true a little bit in recent weeks as well. So we'll talk our way through why that's happening and efforts to offset that and what it all means. Similarly, as the title of this presentation conveyed, U.S.- Canada tariffs are rising.

We're going to talk about that right at the end of the presentation, so don't go anywhere. We will talk about the important developments on that front a little bit later, but certainly concerning in particular for Canada, given Canada's substantial trade orientation toward the U.S.

Of course, as tempting as it is not to focus on things that have been around for a number of months, it's still very relevant that the war with Iran -- I don't know if I can say continues or not -- but nevertheless, the frictions continue. Fundamentally, the Strait of Hormuz remains mostly closed.

And so that's, of course, a problem for the global energy market. And so that continues. And the oil price is still fairly high, though not incredibly high. And of course, linked to that, then, this is still a relatively elevated inflation environment. And so, the energy flow is part of that story. You might argue tariffs are a little bit of that story as well.

Some other things going on. But inflation is still too high. And, of course, that's one of the reasons why the Fed (Federal Reserve) in the U.S. is thinking about hiking rates in the coming months, potentially, and indeed why many of the world's central banks are also orienting a little bit, if still tentatively, in that direction. And then just acknowledging markets, you know, they have been bumpy on the net.

They are rising, if we're talking stocks, more than they're falling, that is for sure. But with some real volatility in there, especially in the AI spaces. You just see such extraordinary revenue projections. And then the adjustments are so large. And so there's a lot of shifting around there. And it is creating some volatility, but still more up than down.

And then lastly, the interesting file. I guess I was saving the best for last because this is an awfully long list compared to many of our interesting files in the past. And so things that don't quite neatly fit into positive or negative. We've seen a slight slowdown in U.S. growth. Still fine. Slight slowdown. But the market actually likes that.

It was worried about too much growth. So we'll get into that a bit later.

The Treasury Department has announced an enhanced bond buyback plan in the U.S., which could help to hold yields down a little bit, but actually it's quite small. And so, we're not convinced it will have a huge effect. The risk is still higher yields.

We're going to talk cybersecurity risk this go around as an economic risk. Obviously it's a risk maybe to you and your passwords or to certain businesses. But there is a certain macroeconomic element which is worth checking in on. We're going to talk about whether AI is inflationary or deflationary. I'm going to give away the ending: it’s both.

It's probably inflationary in the short run. Deflationary later.

We'll talk a little bit, this is kind of the evergreen investor question: Do you want to be overweight U.S. equities or underweight? There are so many compelling arguments on both sides. I'll let you know where we land in a little discussion on that.

And then I'll just mention – and we won't get into this in detail.

I believe we did last month. If you want to refer back, I suppose, to some of our recent written publications. But the U.S. midterms are approaching. They're getting ever closer, kind of astonishingly. They're only a little bit over two months away and it still looks as though the most likely outcome is a divided Congress coming out of this.

And as we articulated a month ago, and we don't think this is the most important theme for investors, but at the margin might be a little bit stock market negative, might be a little bit bond yield negative. It might be a little bit growth negative as well. But really not in an enormous way.

Okay. Let's jump our way in here and really dig into some of those themes in more detail.

That is the goal at this point in time.

U.S. long-term yields on the rise: So we'll start with those rising, in particular, longer-term bond yields. And so you can see that right there. I mean, there's been of course a very real increase since the ultra-low levels were reached in 2020. But beyond the norm of the 2010s and indeed the trend over 2026, you have to concede as per that smaller arrow on the right side is also upwards.

So here we are. You're hitting some of the highest yields we've seen for the 10-year yield for the U.S. as shown here. Not shown here, the U.S 30-year yield has hit a 20-year high recently. So these are unusually high interest rates. The natural question is why. And so there's a big long list I've put it on this slide.

I'm going to try not to say every single word on this slide. But the big part is fiscal in nature. There is a large fiscal deficit. The U.S. public debt is large. You just hit $40 trillion in in recent days. And so it's a symbolic number, if not necessarily enormously more consequential than the dollar before that.

Of course, the 2010s were defined and very much aided, in a bond yield context, by quantitative easing that the central bank was performing, which was kind of holding back interest rates. That's no longer the case. We're in a position where you see a lot of AI companies issuing a lot of debt now.

They have such extraordinary expansion plans that they're no longer leaning only on equities. They're also borrowing. And that's crowding other bonds out a little bit. You’ve got to pay investors more. They've got this other option they can put their money into. And a lot of those AI companies are borrowing at the long end. And so very much directly competing with governments at this point in time.

I think you could argue there's been some declining trust in U.S. policy. There's some questions around the central bank right now with a new Fed chair, questions around the direction of fiscal policy and public policy choices. And so investors are demanding a little more compensation for that.

Certainly there are questions around inflation. It is still too high. And so inflation expectations rising has been at least part of the story of rising yields.

And then even acknowledging just the Treasury, the buyer base, who buys Treasury bonds, government debt in the U.S.? And so, once upon a time, you had a lot of currency reserve managers around the world buying. They’re less in that business. A lot of them own more gold at this point in time. Japan in particular is trying to defend its currency.

And so it's theoretically at least selling U.S. government debt and buying its own currency. And so that's no longer a big buyer. You're more reliant essentially on private sector investors and private sector investors are more rate sensitive. They're demanding higher rates in exchange for their money. And so that's contributing to this. Now importantly, there are offsets here.

And so one would be the U.S. government is intentionally issuing shorter-dated debt, which means that there maybe is less pressure then on long-dated bonds of the sort that I'm showing you here. That you would think is helping somewhat.

The other one is – and this is what the Treasury recently announced -- they're doubling the rate of their bond buybacks.

And it’s worth emphasizing, the bond buybacks up until this point have been very limited, very technical and very mechanical in the sense that it’s really a cleaning up operation. It’s saying, well, this this particular bond isn't very much loved by the market and it's not that liquid. And it's off the run. And so we'll just we'll just go buy that and just making the bond market operate a bit more smoothly.

This now though, in the doubling, is somewhat more than that and is seemingly intended to hold yields down. I think the question is just will it work? It's about $40 billion of bonds set to be bought through to about mid-November. That sounds like a lot until you remember that it's out of a pool of $40 trillion in bonds.

And so it's only 0.1% of the bond pool. And so we would argue that perhaps the Treasury will not be entirely successful in holding yields down. If you're wondering what's the difference? Didn't the Fed do all that bond buying a decade ago and didn't that hold yields down?

I would say yes and yes. The difference is the Fed was printing money and therefore had unlimited capacity to buy bonds.

And the Treasury Department doesn't. It has to use real money. It needs to raise tax revenue and so on for the most part to pull that off. And so it's just more constrained. And so our bias is to say that the risk here is that yields go a little higher from here and perhaps the yield curve is a little bit steeper.

And of course, that then affects mortgage rates and affects the inclination to borrow. And it slows the economy a little bit as well.

Okay. And then just one little aside here.

But is the U.S. aspect of the story overblown? There is a global element: And so we have this pretty cool bond model that helps us actually break down why is it the yields went up? We can break it into three different buckets.

Is it because central bank expectations went up?

And so the answer, with the gold bars here is, is actually not so much looking across countries is not the markets expecting a lot more hiking. Is it because inflation expectations went up? And the answer for most countries is yep, a little bit. The blue bars are positive and pointing upwards.

And so that was part of the story. But you can see the biggest part of the story was the third thing. That's the light gray bars. And that's the term premium. And so it really was just investors saying, I need to be paid more. Maybe I don't trust the government quite as much. Maybe there's just so much bonds to absorb.

You need to pay me more to convince me to go buy your bond. And so that's been a big part, as well.

The other purpose of this chart, though, was to say, listen, this is not just a U.S. phenomenon. It's sort of fun to pretend it's all the U.S. and it's that particular fiscal choice or that particular inflation error.

But actually yields are rising, maybe not in precise lockstep, but pretty significantly across countries. And of course, there are some parallels here. A lot of countries are running large deficits and there are inflation concerns in a lot of places and so on. But maybe just to say, let's not pick on the U.S. too much here. As much as they've got kind of the best story for rising yields, the reality is their yields have not risen the most.

And let's not forget, they are also the world's reserve currency, which does contain certain advantages.

Oil prices remain elevated as conflict stretches on: Okay, let's pivot hard turn, from bond yields to oil prices. So this is our opportunity for a quick little Strait of Hormuz discussion. And so I guess the punchline is just that the Strait of Hormuz is still significantly closed. And so therefore it makes sense that energy prices are still elevated.

And so you can see, as per here, that the price of Brent is in the realm of $90 a barrel. The price of West Texas Intermediate is, as I'm recording this on August 27th, in the realm of I think it's $83 a barrel. And so these are not outrageous prices. And we've certainly seen prices at this or higher levels last spring.

But they're still elevated compared to, let's say, the $60 to $70 barrel price that prevailed, before this war began. So there is a real inflationary cost and economic cost that comes from this. As we understand it, there is some transiting of the Strait of Hormuz. You don't see it very much in the standard data.

It seems to be U.S. convoys protecting certain ships, and perhaps their transponders are off or it's happening at night in a way that it's sort of hard to formally track. We've been trying to follow through and sort out just what has become of the missing oil and gas that would normally have been shipped.

And the answer is, you can see a lot of it is going through some pipelines that are being used more intensively than in the past. A non-trivial amount is trickling through, though it is still very much at a reduced rate versus before. You see other suppliers picking up their production, whether it's Russia or Venezuela or Canada or the U.S.

And you do see some demand destruction. We don't love the demand destruction, just in an economic sense, because that means that somebody's economy is being hurt. And of course, that's half of the concern when there's an energy shock.

And so where is that happening? Well, all over to an extent, but significantly in China. China has proven itself very nimble in terms of ratcheting up and down its oil demand.

And it has significant inventories of its own and it seems capable of demanding of its populace shifts and behavior in a way that it's been able to absorb a non-trivial fraction of the energy shock without hurting its broader economy too much. And so that's a win.

I think also, unfortunately – and this is sort of outside of the realm of our own investing considerations – but when you look at many of the world's poorest countries, maybe unsurprisingly, they are the ones that are eating a lot of this and have reduced their consumption significantly.

And for the most part, they're not in our investment universe. It's not relevant to the companies that we deal with. But there is still some real economic pain and human pain associated with that.

And so that's how the circle is being squared, and that's how the global oil market is still functioning. But there is some pain there all the same. I think we're all pleasantly surprised in the sense that if you told us, gosh, almost six months ago, that this energy shock would continue for six months, you would have guessed that oil prices would be well into triple digits.

And they're not, because you've seen these pretty impressive adjustments elsewhere. So it's still a tricky situation for inflation. It’s sort of being managed. Not clear what the resolution is, truthfully, at this point in time, in the sense that just the latest views would be Oman and Iran are back talking and hoping to arrive at some sort of deal to allow more ships to transit through.

But we sort of heard that story a few times before and it's just hard to know exactly what to believe at this juncture. We're assuming for the moment it's going to be more of the same in terms of oil that's in the in the $80 to $90 a barrel range.

Okay. Over to the general just economic environment, again, focusing for the moment on the U.S.

U.S. economic data surprises becoming less positive: And so this is a measure of economic surprises for the U.S. The surprises have become less positive. I should emphasize they're not reliably negative. So let's not overreact here. But they have become somewhat less positive. The big examples would be the latest U.S. jobs numbers were weak. Another example would be the latest U.S. quarterly GDP number was weak.

Actually those two did disappoint, but others did not. Hence this overall metric. And so I would just say let's not panic.

U.S. Q2 GDP was better than it looked: When we look at the GDP print as per here, yes, it was only 1.5% annualized growth in the second quarter. But the details actually look fine. Domestic demand was up a lot.

For the oil shock, we think the maximum damage was that quarter. And so that's not something that repeats itself in future quarters. We know as well there was an inventory drag and rarely does that persist beyond a single quarter. In fact, they tend to snap back. So that's not going to, we don't think, stick around.

And then trade was a drag. But it was a drag because imports surged, which usually is sort of a good sign for the rest of the economy. And so we would view that as being sort of a benign thing. And ultimately you look at that very colorful bar on the far-right side of the screen, the big blue section, meaning that consumption growth was quite strong.

And then a big gold or light or yellow colour. And that would be business investment was quite strong as well. So the things that you normally think of as being important for an economy to grow actually look quite good. And so we feel okay about that. I would say something similar without the benefit of graphics about the latest U.S. job numbers.

Well, it was negative. So how am I going to work my way into a positive interpretation? Well, keep in mind population growth is very low in the U.S. right now, so you don't need a big positive to say that was a decent number. Again, admittedly, it fell short of that. The unemployment rate though fell, and I'm not going to claim that that can keep happening, even as job numbers are negative.

But it does suggest that the labour market is sort of holding together. And really what we're watching is weekly jobless claims. And those just continue to be quite low. So we're seeing what we think is ultimately an okay U.S. labour market.

With tight economy, good is starting to be bad for markets: But what's fascinating, most of the time when you're dealing with economies and markets, good is good and bad is bad.

And when economic data is strong, the stock market goes up. And when it's weak, the stock market goes down. That's ceasing to be quite as reliably the case. So what I have in front of you is a table showing the really the release date. For the last I have to count now at seven, I believe it is job numbers, for the U.S.

And we've kind of interpreted those as were the job numbers stronger or weak and was the stock market, the S&P 500 response strong or weak? And you can see kind of the colour coding for that. And then the column on the far left then tries to integrate those two things. And so – and the question is very specific – it says is good bad?

And I should say that the question is also: is bad good? In other words, is it reversed? And the answer was for most of this year it's been the usual interpretation. If the job number was good, the stock market said hooray! If it was bad, the stock market said boo. You can see, really for the last three months, things are starting to move.

One of the months, June, was just ambiguous. You had kind of an okay job number. Therefore no real stock market response. But the main number was a really strong job report and the stock market did not like that. It was worried about overheating and inflation and all those sorts of things. The July number then was weak, as I just discussed, and the stock market liked that.

It said, okay, good, we're not overheating quite as much. And that's because again, the Fed is in focus right now. The question is how much rate hiking? When does the rate hiking happen? Stock market’s not a big fan of rate hiking or too much inflation. And as a result, the stock market is saying, listen, we'd like there to be economic growth.

We don't want there to be too much, such that it creates a problem. And so, right now we're all kind of crossing our fingers and hoping for okay growth. And that's sort of actually what they're getting more recently, again, which is being viewed positively.

I hope I haven't confused you. Let's talk about our business cycle scorecard.

Our U.S. business cycle scorecard says mid cycle / late cycle: So we run this scorecard. It contains 60 plus inputs. They have a grand time disagreeing with each other, but we're still able to make some sort of coherent conclusion. The way you interpret this bar chart in front of you is, listen, some of those business cycle inputs say it's the start of the cycle. Some of them say it's a recession.

The full range of six possible outcomes get votes. So it’s not neat and tidy.

Despite that chaos, there is, I think, a relatively clear conclusion. One of those bars is clearly higher than the rest. Maybe more importantly, two of the bars are substantially higher than all the others. And so our interpretation is that the most likely scenario is this is a mid-cycle moment for the U.S. It could be late cycle as well. It’s one or the other, probably safest to bucket those together.

And as I mentioned earlier, I’d love if it was start of the cycle. That tends to be when stock market gains are the biggest. It would mean you had maybe a decade of growth. Yet it's not that, but it's not the end of the cycle. It's not a recession. It's more likely, in fact, it's more towards the middle than towards the end.

And so we think this is a pretty decent place to be. And again, it gives us some comfort in saying that we anticipate more economic growth over the next few years, anyways.

Okay. And so maybe instead of looking at the next few years and in a cycle context, let’s look specifically at what's helping the economy and what's dragging on it. This is a little busy, isn't it?

Growth impulses: the transition from 2026 to 2027: But let's talk about as 2026 starts to transition towards 2027. What are the forces to think about? And so you can see that several of these are along the left-hand side column.

And so for instance, monetary policy becomes less friendly, right? We had an environment of rate cutting over the last few years. And even when the cutting was done, you were still getting some lag benefits from the cutting.

So, 2026, those were universally green pluses for all of the markets examined. You can see as we move to 2027, we're assuming it becomes less favorable. U.S. maybe does some hiking. It's a net negative.

In Canada and the rest of the world, a bit of hiking, but maybe from stimulative to neutral levels. So not quite as negative as for the U.S.Fiscal policy, it’s probably still beneficial, maybe a little less so in the U.S., particularly post-midterm elections. We will see.

The energy shock: this might seem strange -- and we're going to just honestly have to see how the Strait of Hormuz goes – but the energy shock is certainly a negative for most markets for 2026. We're working on the assumption that some resolution can happen over the coming year.

But even if it doesn't, oil prices remaining high is much less bad than oil prices rising. So 2026 was the year of rising, 2027 will be flat to hopefully down. And so less of an active drag, believe it or not, on growth, we think.

Stock market wealth effects, of course stocks have gone up. People have gotten wealthy off of that.

That was a big driver, we think, in 2026. We don't know what the stock market does next year. We're assuming up, but not as extraordinarily up as this year. So a positive but a lesser positive.

We still think there's help for the U.S. from all that AI CapEx. We think that productivity growth is starting to benefit from artificial intelligence.

And maybe even that strengthening a little bit. In the U.S. is, one of the earlier adopters there, and so sees the benefit a bit sooner.

And then you get to the overall and you kind of say, well, we thought it was a pretty supportive environment in 2026. We think it's pretty supportive in 2027 as well.

Actually across the three regions examined, I'll admit I'm a little bit embarrassed. We don't have a tariff row, which would certainly be of relevance to Canada and I guess the U.S. right now. That is obviously a negative. As I'll get to in a moment, we're assuming those tariffs stick around in an elevated state for a couple of quarters and then go away.

And so the reason we haven't put that in is because we're actually assuming that for most of 2027, the tariffs aren't actually any higher than they were as of a couple of weeks ago. And so that's not necessarily the big drag for next year that you might have otherwise thought, at least based on our assumptions.

Okay. We'll keep moving forward here.

AI: inflationary now, deflationary later: And so I want to touch on this. My colleague Josh Nye and I did some really good work on this. It's an important question. I want to share it with you. And so lots of AI questions and themes and issues. And we've grappled with many of those in the past. Let's talk about AI in an inflation context.

And so as I alluded to earlier, our conclusion is in the short term, AI probably adds to inflation. In the long term, it probably subtracts. And, without much precision at all, we are assuming it's actually adding about a half percentage point a year to inflation right now.

Again, in a U.S. context, as our bellwether market and economy, it's increasing electricity prices, all those data centres. It's certainly increased our electronic prices, computer chip costs and so on, as those are on high demand for AI. Also higher construction costs, higher construction labour as well, labour wages and so on, all related to all the data centre construction.

 Software prices seem to be going up more quickly, too. And you could argue whether this deserves to be here because in theory, it's because they're including AI features and the AI features are higher quality. And so they should be charging more. And so technically that shouldn't be inflation.

Inflation's a higher price for the same thing, not for a better thing. But just the way CPI (Consumer Price Index) is constructed, it's showing up as inflation for the moment. And then even this  puts the finger back on us. But you know, the stock market has been so strong from artificial intelligence that investor portfolios in many cases have gone up quite a bit.

And many portfolios are paying, as a fraction of their holdings, a portfolio management fee. And so that's gone up quite a bit. And that actually shows up with inflation, as much as that sounds funny as I say it out loud.

And so we do think there's more inflation right now. The counterpoint would be we're starting, we think, to see productivity gains that should be starting to nibble away at that.

But for the moment, we're assuming that there is moderately more inflation. Over the long run – and a little blurry as to when that transition happens. But over the long run, we think the opposite. We think somewhere between negative  zero – that’s a funny number –but negative 0.4 percent per year, less inflation than normal.

And that's because some of those initial costs go away as you get over the shortages and so on. And then you just start enjoying productivity gains and efficiency gains, and some fraction of that accrues as a consumer surplus in the form of lower prices. And, capital deepening is a reduction in the cost of output per hour.

And that saves money. And now there's a risk here, too, in which AI replaces workers and depresses wages and that pulls inflation down or even weakens the economy. I wouldn't say that’s central to our math here, but just wanted to flag that as well. And we're not convinced that happens either. But again, long story short, unfortunately more inflation for now, but with potentially this benefit somewhat later.

Okay. Continuing on the AI file, we were sort of recently trying to summarize all the different research and all the thinking we're doing. And, I think this does a half-decent, if wordy, job of that.

Big AI questions: And so let's just ask some questions and give you some quick answers for these fundamental questions. And so the first one is, is AI a major general-purpose technology, one of these technologies that comes along every few generations and really changes the world in a big way?

And so we think probably yes. And that's hardly controversial.

Next question: should productivity growth rise more quickly? Well, if you've been paying attention, I've already answered that. But yes, we are budgeting for faster productivity growth, which I should emphasize is very helpful. And it does suggest that the economy moves faster and probably the stock market goes up by more.

And, if we're lucky, wages go faster and all sorts of other nice things are often associated with faster productivity growth.

Will workers be hurt? So, unclear, I guess, is the answer here. Some cohorts will be and that's almost universally true with new technologies. The real question is will, on the net, the labour market be hurt?

And that's not that's not clear. It's tempting to say, yes. It's been tempting to say yes with prior technological changes. And that hasn't generally been the case. And so we're sort of holding fire on this. We’re cognizant it could, but it's not automatic.

Will closed frontier models dominate AI inference? You hear a lot about some of the more famous AI models, and they're moving quickly and they're doing awfully impressive things.

The question is, is this a winner-take-all outcome? Is the one best model just going to be the only model anyone uses, and it dominates and can charge whatever it wants and so on? The answer is probably not. And so we're seeing these open models and sort of fast-following models that are almost as good, but that are massively, in some cases an order of magnitude cheaper.

And that's probably going to be good enough for a lot of things. So not saying, therefore, that the closed frontier models aren't going to make it. I think there's room for all of this. Nevertheless, it may not be quite as lucrative for the frontier model makers as they were initially hoping, if that makes sense.

And so that's perhaps a challenge for those particular companies out there.

And then another question, are hyperscalers and the overall stock market less profitable than they look? And so we've all read about circular deals and the leasing of data centres. And I should emphasize the earnings numbers look awfully good for hyperscalers growing so quickly.

But then you look at their free cash flow and the free cash flow in many cases is shrinking. Or at least not growing as quickly. And you say, well, what's happening here? And the answer is they're making these giant CapEx outlays. And the CapEx outlays only get subtracted from earnings at the rate of depreciation, not as the money's actually going out the door.

And so for hyperscalers to hold together, these need to be good investments that they're making. These data centres need to generate a good return on capital. So far they are, by the way. The actual revenue is exploding. It's growing very nicely. I would say we're relatively positive as it pertains to the hyperscaler part of the AI ecosystem.

But all the same, it's fair to say that maybe the earnings aren't quite as good as they look if you take a closer look, if that makes sense. And to answer the next question: are they nevertheless enjoying explosive revenue growth? They are. That is legitimate. And on the net, there are big exciting opportunities for them.

And they may be more neutral to whether the frontier models or the open models win because they are going to put either of those models and indeed currently, in many cases, put all of those models on their platforms and they can make money off however this thing ends up resolving. And then maybe a question – this is not totally fair because I'm focusing on what could slow things down and there are also questions about what could speed things up.

But in terms of what could slow down the AI growth rate and so prove something of a disappointment, at least in the short run? One would be, again, to the extent these cheaper open models are competing pretty hard, maybe the frontier model makers say, why are we racing so fast when these other models can just sort of copy us and follow along right behind?

And so it could be the whole thing cools somewhat. That's a risk.

Another one would be if that doesn't happen, there are constraints here. I think we've all seen that memory chips are a sharp constraint in the margins of those companies. They have gone up extraordinarily and that is sort of undermining a little bit the value-added proposition for a data centre.

And then the other one is the data centres themselves are not very popular right now. The public isn't so keen on them. You're seeing some U.S. states that are sort of banning or blocking or pausing development of these sorts of things. And of course, they do increase electricity costs and they're slow to build.

And so even if you had no constraints, it's hard to keep up with demand. And so as it stands right now, there are a number of ways this thing could slow down. And so the big takeaway is, again, focusing on the top here. We think this is a big deal. It does drive productivity. It can be a little messy.

And there are some winners and maybe losers at the stock market level. And I guess we've laid that out, as it stands right now.

Okay. Onward from there.

The U.S. equity overweight/underweight debate: Let's talk about the U.S. stock market in a broader context, because it is so extraordinarily unusual to see so many negatives and positives all at the same time. And so, let's talk about the negative side of things.

And so, gee, it's easy to be a pessimist on the U.S. right now. The stock market is the most expensive in the world. And there's a risk that AI underwhelms, you might say. And the U.S. exceptionalism story is perhaps diminishing a little bit. And the reserve currency is becoming a little bit less central to the world and so on.

You know, here we are shifting to a multipolar world. It's no longer only the U.S. in charge. The rest of the world’s losing some trust in the U.S. right now, some obvious political polarization, even perhaps a dash of dysfunction. Policy uncertainty is high. And of course, as we talked about earlier in a bond yield context, there are fiscal challenges and trade barriers.

And, there’s an expansionist foreign policy with kind of an uncertain ending and a dollar that is clearly overvalued. We think the U.S. dollar goes down over a long period of time, which may nibble away at non-local currency investment returns. And of course, China on the rise economically and in terms of innovation and its military as well.

So it's easy to construct an argument saying now is not the time to be invested in the U.S. I would say, let's not leap to that conclusion though, because there are some pretty powerful forces on the other side. This is what makes it so hard.

And so of course, many, if not most, of the top AI companies and tech companies in the world are domiciled in the U.S.

And we do think AI is a pretty huge deal, as we've been discussing ad nauseum for years now. And we're observing very real revenue growth and earnings growth in the U.S. that suggests these companies are thriving and it's broadened beyond just the tech sector. U.S. is maybe not unique, but somewhat special in the risk-taking entrepreneurial culture that's been cultivated there and in the pro-business policies that exist.

And the U.S. is still the fastest growing, for the most part. I should say that, Korea is growing a little faster right now, as is Taiwan, for very concentrated AI reasons. But it's certainly the fastest growing, big developed economy in the world. And it is a dynamic economy. The rest of the world is less stable without the U.S. security guarantee.

And so they are in some measure of flux, and long-term yields are up, but they're up less than in other markets in some cases. And so the U.S. isn't being punished quite as much as you're tempted to think when you look at the bond market. We see the U.S. economy is also pretty resilient to an energy shock, as we're seeing recently.

And so, the challenge is how to deal with this and what kind of weighting mechanism and so on. I'll just say, to cut to the chase, that our conclusion is that it's still a market to be oriented toward, and indeed to be slightly overweight. And so that that's where we are right now, recognizing there are real challenges there, but recognizing at the corporate level in particular, it's still a remarkably impressive place, and particularly if you feel fairly positive about AI as a technology, then that's a place that you have to be to some extent.

Cybersecurity risks through a macro lens: Okay. Let's talk about cybersecurity now. And again, through a macro lens, obviously, hopefully everybody's got virus checkers on their computers and so on. I'm not meant to educate you on that. But let's talk just about cybersecurity as a rising threat to start with.

And so, a large attack surface is the fancy way of saying this, but essentially we are more and more reliant on computers and the internet in almost everything we do and everything is interconnected.

So that does create a very real vulnerability and that is only going up. There's a concentration risk as well, right? A lot of computer systems are all on the same cloud platform and using the same software and perhaps even the same kind of hardware. And so that creates a real risk of one hack taking out a lot of things.

And so, that's a risk. And then of course, with AI – and some of the AI is very much trained to identify security holes and hopefully for good. But as we've seen in some cases it can be used for ill as well. You've got this powerful technology that is able to poke holes in cybersecurity also.

And so the threat is certainly rising. This is relevant. I won't speak to all of this, but this is relevant a number of ways,  via disruption and theft and extortion and espionage and physical damage and so on. We're seeing some cross-sector outages. That CrowdStrike outage in 2024, which wasn't hackers – it was actually just a bad software update.

Nevertheless it was problematic and speaks to this vulnerability regardless of the source. And so this does matter for businesses. It matters for infrastructure. It is increasingly a tool of warfare. So it's a relevant thing. What I'm going to take you towards, so I don't spend an hour on this, is just our assessment.

And so, you can argue already that the damage from cyber, breaks and hacks is on the order of US$500 billion to US$1 trillion per year, which is quite lots, up to 1% of global GDP. So this is a real issue. The consensus is this damage will grow faster than the global economy over time.

So it becomes a bigger issue, not a smaller issue. And there are a couple of key themes and key takeaways I want to share with you about this. And so first of all, as per those numbers, it's already what I would say is a low-grade economic friction. It's already doing damage. And it costs money of course to protect yourself as a company or government as well.

It's more of an evergreen risk than a cyclical risk. And so that is to say, it's just kind of an ever- present risk. It's not like the risk of inflation where it's most visible when the economy is hot or something. This sort of exists at all times. And so it doesn't ebb and flow. It's not particularly, cyclical.

It is already a very real operational risk for companies and for the government. And so we need to be aware of that. For instance, as investors, we need to differentiate between companies that are doing a good job of protecting themselves and their clients and those that aren't. That is a relevant consideration right now.

But fortunately, we would ultimately play cybersecurity more as a disruption than a force for destruction, if that makes sense. The history is that when you get these cyber attacks, companies don't cease to exist. They're disrupted, as opposed to destroyed. And when you think about the motivations behind the hacking, often it's rent seeking, right?

These are hackers trying to extract some money. They're not seeking to kill the host or to kill the company. They're seeking to profit from it. And so it is more disruption than destruction. Therefore, I don't think it's quite a central macro risk. We would view it more as a tail risk, if that makes sense.

And at this juncture – and maybe that's a failure of the imagination -- but we would say it’s unlikely to induce a recession, unlikely to create a real big global financial stability risk.

And so at this juncture, it is more of a headache, if that makes sense. So it's on our radar screen. It's not risk number one, two or three, at least to us at this juncture.

50% tariff on 5% of Canada’s exports to the U.S.: Okay. Let's talk tariffs. And this is how we're going to finish things off with a couple of slides that speak to this unfortunate U.S. trade war of sorts.

And so, the U.S. threatened to and then imposed a 50% tariff on about 5% of Canada's exports. And, if you look at the average tariff rate in Canada, that blue line is where I would focus. The effective tariff rate on Canada by the U.S. was 5.9%. Now Canadian exports, pardon me, are hit at more like an 8.4%, rate.

So that's a significant jump. That is, you know, you just about a 50% increase. So that is a very real, increase. This will be painful.

Canada climbs the tariff rankings: All the same – and not to downplay anything -- but, as per the next chart, all the same, you can say it takes Canada's theoretical tariff rate up significantly. It’s still lower than the world average, still lower than a number of European countries, lower than Japan and so on.

And so, it certainly doesn't put Canada in unfamiliar territory. But it's a big job. And it's challenging in the sense that Canada is so economically and trade oriented toward the U.S. that there's real pain, of course, that comes out of this. And so it's consequential -- unlike a lot of countries, really – only Canada and China are retaliating against U.S. tariffs.

So Canada has, I would say, loosely engaged in a tit-for-tat strategy of applying similar tariffs on the U.S.. It looks like the tariff numbers are coming in actually a little bit lower. Similar amount of products being tariffed but at on average slightly lower rate. And so we will see where this all ends.

It's not great for the Canadian economy.

Potential tariff economic impact: As I'll speak to on this next slide, we have had to downgrade the Canadian growth forecast a little bit. So let's just work our way through the details here.

So, one would be the tariffs that the U.S. has imposed. The latest ones represent or encompass about 0.5% of Canadian economic output and jobs.

And so it’s significant but hardly overwhelming. Certainly we don't expect those sectors to vanish. But of course, there's real damage there. You could envision Canada's unemployment rate going up by as much as about 0.4 percentage points, which no one wants, and the unemployment rate is already too high. However, to put it into context, that would actually just take the unemployment rate back to where it was a couple of months ago.

So it’s not unprecedented territory whatsoever. We would loosely estimate that – and this is Canada's response now, because someone else hitting a country with tariffs doesn't increase the inflation rate of the country being hit. Canada's retaliation adds on the order of 0.1–0.2% to Canadian inflation. That’s undesirable but not overwhelming. And we would figure that Canadian GDP might be about 0.3% lower than otherwise.

Probably a little bit less damage after you get that fiscal response. So the government has promised to help many of the most adversely affected companies. So we have downgraded our Canadian growth forecast a little bit for really the rest of 2026 and into early 2027. And then I should say we have it rebounding a bit, though, because we are assuming this trade war lasts for a couple of quarters.

And so we're assuming next spring it starts to ease. To be fully transparent, it might not. There has been the threat of more U.S. tariffs. It could get worse. Conversely, there's a long history of big tariffs being proposed by the U.S. and they kind of walk them back. So it could actually be less. So there's a number of fairly symmetrical risks, I suppose, is the way to put it.

There is damage to the U.S. economy and inflation is well. It is smaller, at least as a share of GDP, just because the U.S. economy is bigger. And so it just doesn't show up quite as clearly at the top. But it is adverse for the U.S. as well. And of course, the uncertainty that persists in the meantime isn't that helpful for business decisions and investing and that sort of thing as well.

So, it’s undesirable all around. We have adjusted our Canadian forecasts in particular. It's not a recessionary blow or anything close to it, we don't think, but we’re certainly on our toes watching to see where this evolves from here, because it is very much fluid at this moment.

Okay. And I will stop there and say, as always, thank you so much for your time.

I hope you found this interesting. If you're so inclined, feel free to follow along even more closely with our research at rbcgam.com/insights, as is on your page. Or take a look at that QR code or even follow us on LinkedIn. And so hopefully you find some value in that.

I'll just say again, thanks for your time and wish you well with your investing.

Please consider tuning in again next month.