Market Pulse July 2026

Mixed markets in the dog days of summer

We are approaching the end of the "dog days of summer," a period traditionally associated with the hottest days of the year. On financial markets, July was a reminder that strong fundamentals do not always translate into a smooth performance. Corporate earnings continued to surprise to the upside, the AI investment cycle remained intact, and global growth data was generally resilient. However, investors also had to contend with a pullback in market momentum, renewed geopolitical tensions, rising long-term bond yields, and central banks that remained cautious about lowering rates.

Canadian equities ended the month with a modest 1.1% gain as they benefited from strong energy stocks and improving economic data, while bonds were pressured by renewed inflation concerns and higher yields. U.S. stocks declined by -0.1%, ending an up-and-down month little changed from the end of June.

The macro backdrop remains constructive but complicated

U.S. Q2 GDP growth was weaker than expectations, hurt by higher imports and inventories. But the weak headline reading obscured strength in the details, as consumption and business investment remained robust. May GDP in Canada rose 0.3% MoM, beating expectations of 0.2%, and marking the second consecutive month of growth. The Canadian economy appears to be returning to more stable footing after months of stagnation.

U.S. earnings season continued to surprise to the upside, but the market reaction was selective. Companies showing strong revenue growth, margin discipline, and showed a clear path to monetizing AI were rewarded, while companies missing expectations or offering vague guidance were punished. S&P 500 earnings growth is tracking 45% YoY for Q2 compared with a consensus estimate of 22% coming into the quarter. However, much of that growth is attributable to Alphabet and Amazon's combined US$151 billion of "other income" related to equity investments. Excluding these gains, S&P 500 EPS growth is still tracking at 26%, an acceleration vs. Q1 and the fastest pace of growth since 2022.

During the month, we also saw the AI trade broaden, then correct, and then stabilize. Investor concern shifted from whether AI spending will continue to whether returns on that spending can justify the scale of investment. Recent results from major technology companies helped improve confidence, but investors are looking for stronger evidence that AI spending will pay off.

International markets remain an important diversifier

Japan continued to benefit from improving wages, corporate reform, and AI-related capital spending. Europe delivered improving earnings breadth, particularly in financials, industrials, chemicals, and technology, even if investor enthusiasm remained more restrained. Emerging markets were more uneven, with semiconductor-heavy markets experiencing sharp swings as investors reassessed AI supply-chain positioning.

Central bank policy uncertainty remains high.

The Fed and Bank of Canada remain focused on inflation risks, even as prices pressures appear to be gradually easing. Markets may need to get comfortable with central banks staying restrictive for longer.

The opportunity in bonds remains more attractive than it was in the zero-rate era from a yield perspective, but investors should avoid assuming a straight-line decline in yields. A diversified approach to building an income portfolio seems appropriate given inflation and central bank policy uncertainty.

Looking ahead, the second half of the year is unlikely to be about choosing between optimism and caution. Rather, it’s about balance. Equities still have support from earnings, AI investment, and resilient growth, but valuations and narrow leadership argue against complacency. Fixed income offers better income than in the past, but duration should be managed carefully while inflation and central bank uncertainty persist. For clients, the key is to stay invested, remain diversified, and focus on quality companies and quality income rather than chasing the most crowded parts of the market.

What to watch

Investors may want to consider monitoring the following themes through the end of the year:

• Inflation follow-through: One softer inflation print is helpful, but investors need evidence that disinflation is durable, especially in services, shelter, and wages.
• Central bank communication: The market needs greater clarity on what would trigger rate hikes, cuts, or a prolonged hold. Until then, rates volatility may remain a recurring feature.
• Earnings breadth: Earnings growth has been strong, but leadership remains concentrated. A more durable equity advance could require a broader participation beyond mega-cap technology.
• AI return on investment: The question is shifting from “will companies spend on AI?” to “who can monetize AI spending profitably?” That distinction will matter more heading into 2027.
• Oil and geopolitics: Energy prices remain a swing factor for inflation, consumer sentiment, and central bank policy. Middle East developments and shipping routes remain key risks.
• Credit conditions: Credit spreads remain relatively tight. That is supportive for risk assets, but it also leaves less room for disappointment if growth slows or refinancing stress rises.
• Canada-U.S. trade and policy risk: Tariffs, sector-specific measures, and North American trade uncertainty remain important variables for Canadian growth and business confidence.

Monthly lookahead

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