Executive summary
The war in Iran has injected significant uncertainty into the outlook and widened the range of potential outcomes for the economy and financial markets. While risks have intensified, our base case scenario still sees the economy continuing to grow amid a variety of existing tailwinds, allowing stocks to outperform bonds, particularly in non-U.S. regions where valuations are relatively appealing.
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Canada
We have moderately positive expectations for the Financials sector, which is dominated by Canada’s big banks, and other areas of the market, which should provide support for the index in 2026.
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United States
Looking out to the rest of 2026, we are somewhat optimistic about U.S. earnings growth given the profit tailwind of enormous AI capital spending, expectations of AI productivity gains, lower interest rates, and stimulus from tax cuts for both consumers and businesses.
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Europe
Overall, European stocks offer reasonable value supported by improving company profit prospects – but this opportunity requires earnings to materialize over the next 12 months.
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Asia
The economic outlook for Asia over the next 12 months is characterized by a "North-South divide," where technology-driven economies in North Asia outperform while emerging markets in Southeast Asia face domestic challenges.
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Emerging markets
While risks remain significant, especially from geopolitical developments and U.S. macroeconomic conditions, the balance of factors suggests that emerging-market equities may be entering the early stages of a period of sustained gains rather than a temporary rebound.
Economy
The economic backdrop remains surprisingly resilient despite the energy shock, with economic data in both the U.S. and the G10 better than it was a year ago.
Fixed Income
We forecast low-to-mid single-digit returns for government bonds, with the potential to earn higher returns in corporate bonds, though the added compensation for taking credit risk is historically small.
Equities
Following the strong gains of the past quarter, stocks are pricing in an optimistic scenario, assuming that the supportive macro backdrop and rapidly growing profits persist.