Focus turns from rewarding AI build-outs to its use, discipline, and monetization

August 2026 Insights & Strategies

Macro Highlights for July

• U.S. GDP growth of 1.5% (annualized) in 2Q26 was lower than expected, although consumer spending was still up 3.2% after a weak Q1, providing confidence in a still strong economy. Our U.S. team’s forecast remains at 2.4% growth for the year. The Bank of Canada is expecting more subdued growth in Canada, of only 0.7% growth overall in 2026, although preliminary data since that forecast was given suggests that Canadian GDP rebounded significantly in 2Q26, to 3.4% annualized, which could lead to positive revisions to the full year number, despite the lingering uncertainty over the U.S. trading relationship.
• Canada gained 75k jobs in July, which was much better than the 18k gain expected. The unemployment rate also declined to 6.4% from 6.5% in June, the lowest rate in two years, as the participation rate also inched up from 65.0% to 65.1%. The U.S. lost 23k jobs in July, which was well below the consensus expectations of a 95k gain. The unemployment rate however declined to 4.1%, from 4.2% in June, as the participation rate declined from 61.5% to 61.4%. U.S. revisions also now put June gains at +20k (prev. +57k) and May gains at +63k (prev. +129k).
• The U.S. Fed held its policy rate at 3.75% on July 29, although three dissenters likely reflected a growing pressure towards rate hikes in response to an inflation rate that has been above target for five years now. Some economists are citing easing inflation pressures as a justification for remaining on hold, yet any uptick in inflation in the next two reports before the next rate announcement will further increase pressure to hike in September.

Financial Markets in July

• In July, the S&P 500 declined 0.1%, pulled down by the semiconductor segment, bringing its year-to-date price and total returns to 9.4% and 10.1%, respectively. Leadership continued to broadening, as investors demonstrated greater interest in previously lagging and lower-valuation areas of the market, reflected in the equal-weighted S&P 500 delivering price and total returns of 0.9% and 1.0%, respectively, the second consecutive month of outperformance. Excluding semiconductors, the equal-weighted S&P 500 generated total return of 2.5% in July, versus 2.2% for the capitalization-weighted index.
• The S&P/TSX Composite advanced to a new high in July, with a price return of 1.1% and a total return of 1.2%, delivering year-to-date price and total returns of 11.1% and 12.6%, respectively. Energy was the primary driver of gains, supported by the renewed closure of the Strait of Hormuz during the month. Materials and Communication Services were the weakest sectors, while all other sectors posted modest positive returns.
• The S&P 500 has remained relatively steady despite the underlying segments varying wildly as investors digest both anxiety and excitement about the underlying A.I. theme. The TSX Composite has been somewhat more consistent, despite similar fluctuations in the Energy segment, based on the volatility in crude.

Upcoming

• Despite glimmers of hope for a resolution in Iran, and therefore with the Strait of Hormuz, the supply of crude has been strained for months now, and reserves continue to test minimum acceptable levels. Pressure has been eased by China reducing its daily demand from 11.5 million barrels to just 8 million and Middle Eastern producers have been finding alternate channels to get their oil to market. However, the longer that the conflict persists, the greater the chance of something breaking, resulting in a more dramatic and disruptive spike in oil prices.
• The newest deadline in the evolving tariff environment is the August 19 imposition of new Section 338 tariffs that will be imposed on a variety of Canadian goods. Time will reveal if this threat has been to pressure Canada into more concessions, speed up USMCA negotiations, or if implementation will be extended, deferred, or come into effect as planned. Undoubtedly, we can expect legal challenges, which the White House will use to determine if Section 338 becomes the new standard tool, replacing IEEPA, from which the President can threaten and unleash further waves of tariffs on other countries.
• As we progress through a strong earnings season, we will be watching guidance and forecasts for any revisions required to our target on the TSX Composite. We currently expect the TSX Composite to end 2026 at 37,000, based on an 18x P/E multiple on 2026 earnings of $2,055, which is slightly lower than the current consensus expectation of $2,083. This would also imply a 16x P/E/ multiple on the current consensus of 2027 EPS of $2,314, in-line with recent valuation trends, and close to the longer-term average of 14-15x. Our U.S. team has an S&P 500 year-end target of 7,650, based on EPS of US$326 (consensus is US$355) and 23.5x P/E multiple.