Starting 2026 with a bang

January 2026 Insights & Strategies

Macro Highlights for December

• We are still waiting for the U.S. Supreme Court to rule on the legality of IEEPA-based tariffs. The markets are generally expecting Trump to lose the case, but to then re-impose similar tariffs through other means. Questions would still remain on if, how, and/or when, any reimbursements would be due to parties that have already paid into the over US$130 billion in collected IEEPA-based tariffs.
• Labour markets in Canada and the U.S. continued to show softening, although job creation has been staying mostly positive. The unemployment rate in Canada rose to end the year at 6.8%, versus 6.7% at the end of 2024. In the U.S. the unemployment rate is 4.4%, up from 4.1% a year earlier. This relative resilience is likely pushing out any urgency to lower interest rates.
• Despite concerns early in 2025 of GDP impacts from tariffs, U.S. economic growth seems to have fared well, and forecasted to up ~2.0% over 2024, with our U.S. Economics team forecasting 2.2% in 2026. In Canada, a still uncertain trade picture and accompanying constrained business spending is yielding a forecast of ~1.1% growth from 2024 to 2025, and our forecast of 1.2% growth in 2026.

Financial Markets in December

• In December, the TSX Composite recorded price and total returns of 1.1% and 1.3%, respectively, lifting full-year price and total returns to 28.2% and 31.7%, its strongest calendar-year performance since 2009. The S&P 500 ended December on a more subdued note, with a -0.1% price return and a 0.1% total return, but still delivered a solid 2025 overall, finishing the year up 16.4% on a price basis and 17.9% including dividends.
• The U.S. Investment Strategy Group’s base-case S&P 500 target for year-end 2026 is 7,250 (50% probability), based on 24x EPS of US$300. The bull case (35%) assumes a target of 7,750, using 25x EPS of US$310, while the bear case (15%) implies 6,555, based on 23x EPS of US $285. Technology, Industrials, and Health Care remain preferred sectors, while Consumer Discretionary has been upgraded as a contrarian opportunity.
• Our year-end 2026 target for the TSX Composite is 34,000, based on projected EPS of $1,890 and an implied 18.0x price-to-earnings multiple. Materials, Industrials, and Energy are favoured, reflecting their positioning to benefit from Budget 2025. Financials, particularly the major banks, should also be supported by stronger business activity and a pickup in investment projects, while Information Technology remains supported by the continued A.I. megatrend.

Upcoming

• The joint review of the USMCA, including the July 1 deadline to confirm if the agreement will be extended for 16 more years, will likely be the most consequential event for Canada this year. While we are optimistic of a reasonably good outcome for Canada, we are also braced for high-priority demands from the U.S. related to rules of origin, digital services, and the dairy industry.
• Economic conditions and still relatively resilient labour markets have reduced the urgency for more policy interest rate cuts. In Canada, we continue to see the potential for one cut if a drawn-out USMCA renegotiation, escalating threats from the U.S., or significant increase in the unemployment rate entice the BoC to move into stimulative territory, below the current 2.25% rate, which is at the low end of the 2.25-3.25% neutral range. In the U.S. we see a greater likelihood of rate easing from the current 3.75% rate, but with the timing clouded by a still resilient economy, still sticky inflation, and renewed attacks on Fed independence. Next BoC and Fed announcements are coordinated to be on January 28, March 18, and April 29.
• As 4Q25 earnings season kicks off, we will be watching for earnings strength and breadth which is likely needed to keep the current positive market momentum.