Mid-year update: Key themes for 2026

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U.S. an outlier among global central banks

• Policy rates across Canada, Europe and other major central banks largely stabilized after the 2025 interest rate easing cycle. However, the U.S.–Iran war has reignited inflationary pressures, complicating matters for central banks that likely planned to keep rates on hold. For example, the European Central Bank hiked interest rates in June in response to higher inflation. We expect the Bank of Canada to keep rates steady for now.
• Having spent much of 2025 with interest rates on hold, the U.S. Federal Reserve (Fed) has moved away from early 2026 expectations of rate cuts. Instead, it’s maintaining a more cautious stance given resilient growth, persistent inflation and stronger-than-expected earnings. The new Fed chair, Kevin Warsh, was hawkish in his inaugural press conference.
• For equity markets, this reinforces the “higher for longer” interest-rate narrative. Valuations remain elevated and stocks are increasingly supported by earnings rather than further increases in valuations.
• The U.S. dollar has been more resilient than initially expected, supported by relatively strong economic growth and higher yields.

AI investment cycle broadens but the ROI debate intensifies

• The AI capital expenditure (capex) cycle has continued into 2026, with sustained investment in semiconductors, memory, data centres and energy infrastructure supporting strong earnings growth in technology and adjacent sectors.
• However, markets have increasingly shifted focus from buildout to monetization, with return on investment (ROI) gains at scale still proving elusive.
• Rather than a sharp reversal, we’re seeing a broadening of stock performance beyond the initial concentration in AI mega-cap stocks to other beneficiaries of AI capex and the next supply chain bottlenecks – such as high-bandwidth memory.
• The labour market impact remains unclear. Productivity is improving, but unevenly. Significant increases in AI model token costs* are also causing companies to slow down AI adoption.

K-shaped dynamics persist to evolve across sectors and regions

• The “K-shaped” economy (a pattern where certain parts of the economy perform well while others stagnate) remains a defining feature. We continue to see consumer divergence by income levels, as well as a sharp divergence between sectors benefiting from the AI capex cycle versus rate-sensitive sectors like housing.
• Strong asset markets and corporate profitability continue to support higher-income consumers, while sensitivity to rates and inflation still weighs on more cyclical sectors and lower-income consumers.
• Importantly, K-shaped dynamics are increasingly visible within equity markets themselves, with earnings growth and positive earnings surprises concentrated in specific sectors while others lag.
• This dynamic continues to favour selective exposure, as aggregate growth masks wide and persistent unevenness beneath the surface.

Multipolar world themes strengthen amid geopolitical and commodity shifts

• The shift toward a more fragmented global order has accelerated. Geopolitical conflicts like the U.S.–Iran war are a feature, not a bug, of this multipolarity. This means energy security, defence and trade diversification are playing a larger role in market leadership and government spending.
• Defence spending in Europe remains a structural tailwind, while energy markets have been shaped by geopolitical tensions and supply disruptions, reinforcing the importance of energy security.
• Commodities have been supported not only by electrification and AI-driven demand (e.g., copper for power infrastructure), but also by ongoing diversification into gold away from U.S. dollar reserves.
• China’s focus on strategic industries, including robotics and advanced manufacturing, continues to drive localized opportunities, even as overall economic growth remains uneven.
• In this environment, regional and thematic diversification in portfolios remains critical to capturing differentiated sources of return.

Dispersion and earnings breadth reinforce the case for active management

• Market leadership has been broadening as earnings growth expands beyond the largest technology names, creating a more fertile environment for active strategies.
• The combination of AI-driven differentiation, sectoral dispersion and macroeconomic uncertainty is increasing the range of outcomes across companies.
• With higher interest rates and tighter financial conditions persisting, company balance sheet strength and capital allocation discipline are becoming more important drivers of performance.
• Active managers are better positioned to identify companies with sustainable earnings growth, particularly as markets reward execution and profitability over thematic exposure alone.