February 27, 2026 | Quiet Counsel | 10 min read

Outlook 2026: Looking Beyond "The Big Shrug"

The past year has proven that even having perfect foresight of front-page headlines can provide little insight into how you should invest. Over that short period, we have endured persistent trade policy posturing and threats; domestic political turmoil involving the Departments of Justice, Homeland Security, and the Federal Reserve; and multiple direct military interventions abroad with threats of more, including against a NATO nation. As I mentioned at our recent client Outlook events across Canada, since inauguration, there have been 57 presidential memoranda, 126 proclamations, and 243 executive orders—the highest pace since FDR in 1933—not to mention nearly 6,000 Truth Social posts. 

After all that, US markets were up double digits and Canada and international markets had some of their best years. It brings into question the value of Outlook articles at all! With that said, it’s worth understanding why the market has largely shrugged off this remarkable year, and how sustainable it may be going forward. Let’s start with a look at the numbers. 
 

2025 and The Big Shrug

In 2025, the S&P/TSX Index rose 31.7% while the S&P 500 and MSCI EAFE gained 12.5% and 25.2%, respectively (all figures in Canadian dollars). Beyond these stellar equity performances, many other measures of market and economic health remained essentially unchanged after the chaotic year of headlines. As Figure 1 shows:

• 30-year Treasury yields are basically flat year over year, indicating the market’s outlook for the economy, and the potential for inflation reacceleration, remain relatively sanguine.
• Valuations for US stocks, reflected in the forward price/earnings ratio for the S&P 500 index, are essentially unchanged at 22.4x while earnings expectations have actually risen slightly to 19.2%. Given those higher overall earnings expectations, stock prices are actually a little cheaper than last January.
• The CBOE Volatility Index measures how much investors expect the stock market to go up and down in the upcoming month. After spiking briefly to 45% on Trump’s initial announcement of global tariffs, it has retreated nearly all the way back to last year’s level, at 17.4% - near its lows in the last decade. Market watchers currently expect continued smooth sailing.
• Credit spreads represent the premium that bond investors require to hold bonds that carry the risk of default (mostly from corporate issuers). Both investment grade (higher quality) and high yield (lower quality) spreads are basically also back where they started, at 0.49% and 3.16%, respectively. And these levels are also near their lows of the last decade. Bond holders are really not worried about default. 
   

Figure 1: Key Market Indicators – Jan 31, 2025 and Jan 31, 2026

Source: Leith Wheeler Investment Counsel Ltd., Bloomberg.
(1) Sourced from Macro Micro.

Across the board, stock and bond markets are telling us they are unconcerned about what happened last year, and that they feel relatively optimistic about 2026. So… is the market right? Or should we be worried?
 

Loud headlines but quiet markets... Why?

The Big Shrug could be explained by one or more of these three dynamics:

Fundamentals still drive markets. Benjamin Graham, the father of Value investing, famously wrote that “In the short run, the market is a voting machine; in the long run, it is a weighing machine.” In other words, you can expect the market to overreact to headlines, but ultimately, fundamentals are what are rewarded (or punished). The market eventually looks through noise and gets to the heart of true risk and opportunity. This interpretation suggests traders markets didn’t trade down in 2025 because the fundamentals were not impaired. With earnings up over 15%, real GDP growth at 2%–2.5%, inflation settling to 2.5%–3%, and strong consumer spending, perhaps things are not as broken as headlines imply.

There is no "one market". The S&P 500 is in fact comprised of two “markets.” While the broad index rose 12.3% last year, Nvidia, Alphabet, Broadcom, and Microsoft represented over half of those gains (source: Bloomberg) and over the last three years, the “Magnificent 7” accounted for well over half of the S&P 500’s 88% total gain.

The S&P 500 Equal Weighted Index trades six multiple points lower than its more popular capitalization-weighted one. This demonstrates that the biggest weights are trading at higher valuations, pulling up the overall figure. In other words, while some pockets are priced for perfection, big swathes of the market still offer value. This is good news for Value investors like us, who are always looking for opportunities to buy good companies at great prices. 

Narrow time horizon. Related to the fundamentals discussion above, the time horizon argument reinforces the fact that the impact of policy decisions cannot be expected to be felt immediately. Tariffs may have been introduced to encourage onshore investment in the US and raise funds for budget deficits, but those factories will take three, five, even 10 years or more to appear (assuming the policy works as intended). Import and export activity may shudder in the short term but alternatives may replace them. Prices may rise on affected goods but it will take time to determine how much of the tariff will be absorbed by the supply chain and how much by US consumers. Acknowledging the success or failure of the policies is somewhat unknown at this point, it’s possible the market is taking a “wait and see” approach for now, and giving Trump the benefit of the doubt. 
 

Taking stock of US policy

Let’s dig a little deeper into the specific policies that markets have had to digest this year. As Figure 2 shows, there have been some offsetting impacts. 

Figure 2: The Impacts of US Policy

The tax cuts Trump introduced in his first term were extended in 2025, meaning taxpayers will start receiving larger rebate cheques and therefore enjoy more disposable income in 2026. This adds to deficits, however, which sit near 6% of GDP and are expected by the Congressional Budget Office to grow to nearly 7% over the next decade – hindering their fiscal flexibility and putting pressure on the US dollar. 

Businesses (and markets) love certainty and Trump’s deregulation promises are popular policy among small businesses, whose sentiment indicator surged early in 2025 but faded as tariffs increased costs and disrupted supply chains. Deregulation benefits are clear in energy policy; less so in financial services, where affordability rhetoric has created uncertainty. 

On tariffs, the administration issued about 49 tariff threats in 2025, with over 30 used primarily as negotiating tools to extract other promises. The “strategic sectors” of steel, aluminum, automobiles, pharmaceuticals, and semiconductors have targeted protections, as the administration wants to attract and protect onshore manufacturing in these areas. Studies suggest about 80% of tariff impacts are borne by consumers – turning them effectively into an inflationary sales tax. Despite the early threats, the US weighted average tariff rate is now about 13%, with half the burden borne by India and China (source: Bloomberg). With all this said, as of writing the US Supreme Court has just ruled that the 2025 tariffs were in fact levied illegally – so certainly more to come on this topic this year.

Raids targeting illegal immigrants garner much attention, but continued restrictions on legal immigration, in conjunction with a low birth rate, will also continue to have a significant effect on the US workforce. As discussed in last year’s Outlook (Part II), without immigration, the US population growth rate is expected to turn negative by 2040. Immigration is critical for GDP growth and for funding programs like Social Security and Medicare, particularly as the population ages.
 

Artificial opportunities?

All of this is happening, of course, during a period of major technological change. Artificial intelligence (AI) has dominated markets the past few years as the world’s largest companies have cut the world’s largest cheques to expand their capacity to compute and store data. While we believe advances in AI will produce transformational change in our lifetimes, investors don’t always price the opportunities correctly. Figure 3 shows that during the Tech boom of the late 1990s/early 2000s, Cisco, Nortel, and Corning were market darlings – only to fall the hardest when investors reset their expectations for when web-based companies’ would generate actual profits. 

Figure 3: Long-term winners and losers of the Tech Bubble

Source: Leith Wheeler Investment Counsel Ltd., Bloomberg, MSCI Inc.

These three companies were the builders of the internet’s infrastructure. A similar corollary could be drawn to the hype around today’s massive investment in AI execution. Figure 4 shows the past and estimated capital expenditures of today’s Major AI Hyperscalers.

Figure 4: Capital expenditures from major AI hyperscalers⁽²⁾ (Alphabet, Amazon, Meta, Microsoft, Oracle) 

Source: JPMorgan on January 29, 2026

Looking back at Figure 3, you see some of these same companies were the long-term beneficiaries of others’ infrastructure investment. They had asset-light business models that let them innovate and scale, generating massive returns on invested capital (ROIC) for shareholders. The questions today thus become: who will be the ultimate winners of the AI race, over what timeframe, generating what ROIC, and how will markets reward (or punish) them along the way?
 

Canadian prospects

While the three gold miners in the picture above reflected the dominant theme in Canada’s economic outlook in centuries past, three key factors will likely impact Canada’s outlook for 2026: trade and tariffs, immigration, and technology.

Trade & tariffs. While Canada is taking steps to diversify our trade partners, the US remains our largest by far. So tariffs – especially the strategic ones pointed at autos, aluminum, and steel – will continue to impact us in 2026. The federal government’s focus on building internal infrastructure and developing Made-in-Canada industries should help support economic growth, independent of external demand. 

Immigration. Like the US, our birthrate doesn’t support our population, so immigration policy will also be important to growing GDP and supporting social programs. The key going forward will be balancing the pace of increases with communities’ ability to absorb new Canadians. Should immigration growth stagnate, upward pressure on wages will likely result. Finally, US policy may create opportunities for Canada to attract skilled immigrants as the US tightens legal migration.

Technology & AI. In the short-term, the impact of technological / AI innovation on wages in Canada will likely be mixed: layoffs and downward pressure on roles that can be automated, offset by higher demand and pay for skilled technology roles – resulting in mild inflation and slow GDP growth. If we can monetize AI efficiently, over the medium term we can expect productivity gains and broader GDP growth. The key risk here is expectations: if technology gains are delayed or overstated, the economy may underperform expectations. 
 

CUSMA

One final factor on many clients’ minds is the pending renewal of the Canada-US-Mexico Agreement (CUSMA), the negotiations for which are due to begin this summer. What are the true risks of it being scrapped? 

Legally, the Agreement has features built in that protect industries in all three countries from an attempted sudden, unilateral withdrawal. As Figure 5 illustrates, a failure to come to terms on an extension this summer prompts a series of up to 10 annual reviews before CUSMA is automatically terminated. That technically gives us until 2036 to agree. 

Figure 5: Review & Term Extension Process for CUSMA (Article 34.7)

Source: Bloomberg

With that said, US negotiators will likely push hard for tough terms; may propose two bi-lateral agreements with each of Canada and Mexico instead of the current tri-lateral structure (we don’t have to agree to this); and possibly attempt to circumvent the law by declaring the Agreement invalid.

Under Article 34.6 of the Agreement, the US technically has the ability to provide six months’ notice of their intent to withdraw, but the US constitution requires the President to consult Congress. Should he attempt to unilaterally withdraw, he would likely be challenged immediately. Given the recent Supreme Court ruling on tariffs, the court appears increasingly skeptical of the President using emergency powers to override trade laws. Congressional approval of a withdrawal is also highly unlikely given Congress’ passage (with Republican support) of a bill to remove the previous tariffs on Canada.

Should the US successfully obtain the required approvals, CUSMA guides that the remaining two parties would continue within the pact. 
 

Return expectations and takeaways

Interest rates in Canada have returned to neutral levels of around 2.25% and inflation has receded from a peak of 8% to about 2.5%–3%. Markets expect the Bank of Canada to hold steady, while the Federal Reserve may ease once or twice later this year.

In this environment, we expect bond portfolios to earn roughly their yield of ~3%–4%, and our long‑term equity expectations remain in the 6%–8% range. 

Our key takeaways for clients are as follows:

• We are maintaining a defensive posture in client portfolios – some asset prices are reflecting the market’s optimism, but geopolitical risk remains high.
• We are finding pockets of value – from a bottom-up perspective, individual sectors and companies still represent meaningful investment opportunities.
• We are thinking long term – no surprises here, but financial resilience, diversification, and quality management teams remain our focus.