Geopolitics: Insights from Crises

The memorandum of understanding between the U.S. and Iran has mostly held, though periodic tensions continue to test its durability. Financial markets have drawn confidence from a notable pickup in shipping through the Strait of Hormuz, which has sharply reduced downside risks to the economy. Equity markets continue to hover near record highs, bond yields have eased from conflict-driven peaks, and oil prices have retraced much of their previous rise.

While key negotiating points remain unresolved, recent events underscore the value of maintaining a long-term perspective. History shows that market reactions to geopolitical shocks tend to be temporary unless they materially impair economic growth or corporate profitability. Equally important, the global economy is influenced by a wide range of interconnected forces rather than any single event and its ability to adapt to supply chain disruptions is often underappreciated. Although the Strait remains a critical energy transit chokepoint, the economic fallout was softened by a world economy that has significantly reduced its “oil intensity” over time, as well as by inventories and the ability of businesses and consumers to adapt quickly.

More broadly, the U.S.-Iran conflict reinforces why we believe a disciplined and multi-lens approach to portfolio management is an effective way to navigate uncertainty while participating in long-term market appreciation.

Looking Back, Looking Ahead

Despite unsettling geopolitical headlines, the first half of 2026 was ultimately a strong one for markets. Global equities advanced roughly 15% in Canadian-dollar terms, supported by sustained AI-related spending and rising earnings expectations. U.S. equities posted similar gains, driven largely by the same forces. Canadian equities also performed well, returning roughly 11%, with Financials, Energy and Industrials among the key contributors. International developed markets (+14%) participated in the rally, while emerging markets (+28%) were the standout, benefitting from strength in Asia tied to AI infrastructure.

Meanwhile, inflation uncertainty weighed on fixed income returns as yields moved higher—which pushed prices lower—with global bonds essentially flat and Canadian bonds generating modestly positive total returns.

Looking ahead, the second half begins with a more favourable economic setup than the geopolitical environment suggested just a few months ago. If flows through the Strait continue to normalize, lower fuel prices should directly benefit consumers while reduced transportation and fertilizer costs could help moderate inflation. These benefits should be especially meaningful in regions with greater dependence on imported energy, including Europe and Asia.

In the U.S., business investment in AI will likely remain a key pillar for the economy and markets, albeit one that also introduces risks as debates around AI disruption and whether companies can earn an adequate return on that outsized spending swing between optimism and caution.

In Canada, RBC Economics anticipates growth and labour market conditions to gradually improve through the second half. However, trade policy remains an important source of uncertainty. The CUSMA review process has shifted into an annual review framework rather than a straightforward 16-year extension, leaving the agreement in place but prolonging uncertainty for businesses that could dampen investment and hiring decisions.

Takeaway

The first half of the year provided another reminder that markets can remain resilient even amidst a steady stream of worrisome headlines. While that resilience is reassuring, it is worth noting that valuations across most markets are reflecting a fairly upbeat outlook, potentially leaving less room to absorb disappointments should earnings or economic growth fall short of expectations.

On balance, our central economic scenario continues to support a reasonably constructive path for markets in the quarters ahead, with diversification and a disciplined investment approach remaining the foundation for navigating an increasingly complex environment.