Market Pulse August 2026

Equities: Resilience meets rising rates in August

Global equities advanced in August as strong corporate earnings and continued artificial-intelligence investment outweighed renewed inflation and interest rate concerns.

The S&P/TSX Composite reached record levels during the month, supported by its significant exposure to financials, energy, and materials. Elevated oil and gold prices benefited resource producers, while solid bank earnings supported financial shares. Though bank valuations are becoming stretched and Canada–U.S. trade tensions have escalated, Canadian equities generally appeared more defensive than some of their global peers during periods of market volatility, based on observed market movements during the period.

U.S. equities experienced greater volatility as long-term Treasury yields pushed to multi-year highs. Second-quarter earnings growth for the S&P 500 was among the strongest since 2021, supported by continued spending on AI infrastructure and resilient consumer demand, yet investors reassessed valuations of large-cap technology and AI-related companies. The rise in bond yields created pressure on growth-oriented sectors during the month, but broader market participation improved. Equal-weighted indexes generally held up better than headline benchmarks, suggesting market gains are becoming less dependent on a handful of mega-cap stocks.

International equities continued to deliver solid results, reinforcing the case for global diversification. Developed markets outside North America benefited from improving earnings trends and attractive valuations relative to U.S. equities.

One notable trend this year has been the changing nature of diversification. Emerging market indexes are increasingly influenced by technology and AI-related companies, while Europe continues to provide greater exposure to industrials, financials, and multinational exporters. Investors who diversify globally are gaining access not only to different economies but also to different sources of earnings growth.

Bond markets remained the focal point for investors in August. U.S. Treasury yields moved higher, with long-term yields reaching levels not seen in many years. Markets grappled with concerns around persistent inflation, increased government bond issuance, and the possibility that policy rates may need to remain higher for longer.

Fixed income: Higher yields improve the opportunity set

While rising yields can create short-term volatility, they've also improved the opportunity set for fixed income investors. Higher starting yields may enhance future return potential and can increase expected income relative to much of the last decade (though outcomes will vary and aren’t guaranteed). For diversified investors, bonds may help provide portfolio diversification and income.

The U.S. Federal Reserve kept interest rates unchanged during the month, maintaining its target range at 3.50% to 3.75%. However, policymakers struck a more cautious tone, with several officials expressing continued concern about inflation and indicating that additional rate hikes couldn't be ruled out if price pressures persist. At Jackson Hole, Fed chair Warsh further emphasized that inflation remained too high—headline PCE inflation was 3.7%—while describing output and the labour market as solid. Markets interpreted the message as "higher for longer," contributing to the rise in Treasury yields.

Canadian policy rates unchanged

The Bank of Canada (BoC) delivered a decision largely in line with our expectations at their September 2nd meeting. It acknowledged that growth picked up in Q2 2026 and that inflation has evolved broadly in line with its assumptions. As a result, no change to the policy rate was warranted. Regarding the latest trade tensions with the U.S., the BoC appears to be taking a balanced view, weighing the potential drag on growth (beyond the directly affected industries) against the inflationary impact of upcoming Canadian retaliatory tariffs. The conflict in Iran remains an inflation risk, but the BoC continues to see little evidence that supply chain disruptions in the Middle East are spilling over into broader goods and services prices.

Given the uncertainty generated by trade tensions with the U.S., and the fact that the situation remains far from equilibrium, with additional trade and non-trade measures likely to be announced, we don't believe the BoC has sufficient clarity to anchor a firm economic outlook for 2026. As a result, our current base-case assumption is that the BoC may keep rates unchanged, though policy decisions could differ as conditions evolve.

That said, assuming only limited additional trade restrictions from here, the bank’s focus could gradually shift back toward narrowing economic slack and firmer growth beginning in mid-2027, depending on evolving conditions. Under this scenario, we'd expect the BoC to raise rates three times, bringing the policy rate to 3.00% by March 2028.

Overall, August reinforced a two-sided investment backdrop: earnings and capital spending remained supportive for equities, while elevated yields, tight credit spreads, and persistent inflation argued for continued diversification and selectivity.

‘Tis the season

A market adage worth remembering this time of year is that September has historically been the weakest month for equities. Since 1950, the S&P 500 has posted a median negative return in September, making it the only month of the calendar year with a consistently negative long-term median return. The market has also finished September in the red more often than not, reflecting a combination of seasonal factors, including lower summer liquidity, portfolio repositioning after the vacation period, and increased volatility as investors refocus on economic and earnings expectations.

_{Source: Bloomberg, Manulife Investment Management, Capital Markets Strategy, as of December 31, 2025}

That said, seasonality is a tendency, not a forecast. While September's historical track record warrants respect, it should be viewed as a reminder rather than a reason to abandon a disciplined investment strategy. Strong underlying fundamentals and positive market momentum can often outweigh seasonal patterns.

What to watch 

Investors may want to consider monitoring the following themes in September:

• Ongoing conflict in the Middle East and its impact on oil prices and the markets
  
  
• Trade tensions between the U.S. and Canada could have lingering effects on the health of both economies.
  
  
• Inflation data, which will remain the primary driver of interest rate expectations and bond yields.
  
  
• Labour market conditions in both Canada and the United States as central banks assess whether economic activity is slowing enough to ease inflation pressures.
  
  
• Corporate earnings guidance and business investment trends, especially within technology and AI-related industries that have been leading market performance.
  
  
• Commodity prices, including oil and gold, could influence both Canadian equity performance and inflation expectations.
  
  
• China's economic trajectory, as signs of stabilization or further weakness could have meaningful implications for global growth and emerging markets.
  
  
• Market valuations and seasonal volatility, as strong year-to-date gains leave markets more sensitive to economic surprises or policy missteps.

Bottom line: The fundamental backdrop remains constructive, but September is likely to test whether strong growth and earnings can continue alongside restrictive monetary policy and lingering inflation pressures.

Monthly lookahead

Important disclosure

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