The economic and earnings outlook remains constructive, though several risks warrant continued attention. We discuss economic resilience, the recent equity rebound, and inflation expectations in more detail below.

Economic Growth Holding Up

The global economy continues to prove resilient in the face of a volatile macro backdrop. Business activity readings have rebounded from recent lows, consumer confidence surveys have improved, and steady wage gains have supported household spending. Barring a significant weakening in these trends, we believe the environment should remain supportive of corporate earnings and growth-sensitive assets.

There are, however, several uncertainties that warrant attention. Oil prices remain a key source of both growth and inflation risk, particularly given the recurring “escalate, de-escalate” pattern in the Middle East. We are also watching whether the substantial investment in AI can translate into tangible productivity gains and returns on capital.

Equities Move Higher

Global equities traded within a relatively narrow range between May and July as investors digested commodity price volatility, rising bond yields and share price weakness in AI-related companies. The pullback was particularly pronounced among tech hardware companies—semiconductors and memory-chip producers—whose earnings have benefited tremendously from the surge in AI infrastructure spending, as the sustainability of that spending came under greater scrutiny.

Importantly, the correction in the AI investment theme did not translate into a broader equity market correction. As noted in our previous letter, market leadership has continued to broaden across sectors and regions, while corporate results have remained generally strong. This has helped major equity indexes absorb periods of AI-specific volatility.

More recently, markets have regained upward momentum, with U.S. and Canadian equities, along with broad global equity indexes, at or near record levels. Strong earnings have been an important catalyst. With the bulk of Q2 reporting season complete, companies have broadly delivered against elevated expectations across major markets.

Recent results from large tech companies have also provided further evidence that demand for computing capacity remains robust. This has helped ease some concerns about the durability of AI-related capital spending and supported a rebound in technology equities. Questions about the sustainability of AI spending are likely to linger.

The interest-rate backdrop has also become less worrisome. A weaker-than-expected July employment report reduced expectations for a Federal Reserve hike in September, while July’s consumer inflation was in line with expectations.

Inflation Eases Bond Yield Pressures

U.S. consumer prices increased at a relatively modest pace in July, rising incrementally from the month prior but decelerating on an annual basis. Energy prices were an important contributor to this improvement, with the year-over-year rate of energy inflation falling to 14.7% from a peak of 23.5% in May.

U.S. bond yields are still meaningfully higher today compared to the start of the year but have recently shown signs of stabilization. Attention will now turn to the August inflation data for evidence that the recent moderation is becoming more durable.

Given the current level of starting yields across fixed income markets, we believe mid-single digit returns over the next 12 months represent a reasonable expectation for a diversified fixed income portfolio.

Takeaways

Despite considerable volatility over the past year, financial markets have continued to generate worthwhile returns for investors. The combination of an expanding economy and growing corporate profits, bolstered by resilient consumer spending and sustained business investment, suggest the outlook remains constructive.

At the same time, full valuations in select markets, uncertainty around inflation and the potential for rapid shifts in sentiment toward the AI theme continue to reinforce the importance of maintaining adequate diversification. As a risk management tool, we also believe it is sensible to periodically review portfolios for rebalancing opportunities to ensure allocations do not drift too far from long-term strategic targets.

Should you have any questions, please feel free to reach out.

David Blair