Markets continue to balance ongoing policy uncertainty against a resilient economic backdrop. While headlines around trade and geopolitics create volatility, the underlying earnings picture remains solid. Here’s what’s unfolding and what it means for your portfolio.

The Policy Cycle: Escalate, De-escalate, Repeat

A consistent pattern has emerged in both trade and geopolitical policy under the current U.S. administration: aggressive posturing followed by de-escalation after negative market reactions. In 2025, sweeping tariff threats provoked severe market volatility before being partially rolled back. A similar sequence is unfolding in the Middle East, renewed military exchanges drove oil prices and bond yields higher, but intermittent pauses in hostilities have revived hopes for diplomatic resolution. New U.S. tariff proposals have also resurfaced.

One risk of this recurring cycle: Investors may become conditioned to expect eventual policy reversals. If markets begin to look through initial announcements, reactions could become less pronounced, potentially reducing pressure on policymakers to change course.

Our view: We continue to see de-escalation in the Middle East as the most likely outcome, though the path will likely remain uneven. While these recurrent shocks will test the economy’s resilience, underlying fundamentals remain reasonably constructive. Recent data points to global growth around 3%, somewhat slower than last year but still a healthy environment capable of sustaining corporate earnings growth.

Earnings Season: Strength and Selectivity

Earnings season is well underway in the U.S., with over half of S&P 500 companies reporting Q2 results. U.S. companies have comfortably exceeded expectations. If current growth rates hold, it would mark a seventh consecutive quarter of double-digit earnings expansion and a second quarter exceeding 20%. Strength is also evident outside the U.S., with Canadian and global earnings tracking near the upper end of their post-pandemic ranges.

However, the market’s reaction to earnings reveals an important shift in investor sentiment. Elevated earnings optimism has raised expectations, making the typical "meet or exceed" result increasingly likely to underwhelm, particularly among AI-related companies. Demand for AI infrastructure remains strong and results continue to show that spending is translating into tangible returns. But investors are becoming increasingly selective: rewarding companies where AI investments generate visible near-term returns while applying greater scrutiny to businesses where capital spending continues to outpace profitability.

This selectivity is healthy. It reflects a maturing market that’s moving beyond euphoria to evaluating actual returns on investment.

Market Leadership Broadening Beyond AI

AI-related companies remain key contributors to earnings and Technology continues as one of the top-performing sectors. But their market leadership has recently taken a backseat. Over the past two months, Health Care and Financials have led, with eight of the eleven S&P 500 sectors advancing. This broadening participation is encouraging.

Performance has also widened geographically. Even after a pullback from June’s record highs, emerging market equities remain the strongest-performing region, returning roughly 15% year-to-date. International developed markets have returned around 14%, followed by Canada at 13%, while U.S. equities have gained roughly 12%.

In our view, broader participation across sectors and regions provides a more balanced foundation for equity returns than one driven by a narrower group of companies. This diversification reduces concentration risk and suggests the market rally has more sustainable footing.

What Warrants Our Attention

We remain reasonably constructive on the outlook for equities and risk assets. The economic expansion is intact, and earnings trends imply broadening strength across sectors and regions. However, several risks capable of contributing to market volatility continue to warrant attention:

• Commodity price swings tied to ongoing geopolitical tensions
• Inflation uncertainty as central banks navigate policy
• Potential shifts in AI-related sentiment if returns on investment disappoint
• Evolving U.S. policymaking around trade and tariffs

Our Approach: Balanced and Diversified

Given this mix of opportunity and uncertainty, we remain committed to a balanced approach to portfolio management. We prioritize diversification across sectors, regions, and asset classes to prepare for a wide range of outcomes.

Your strategy:

• Maintain your strategic equity allocation in line with long-term targets
• Preserve diversified exposures across sectors and geographies
• Focus on fundamentals: earnings growth and economic resilience, rather than headlines
• Recognize that policy volatility, while uncomfortable, often precedes constructive outcomes

Your portfolio was designed for precisely this environment: one where policy uncertainty and market swings are features, not bugs, of long-term investing.

If policy developments or market moves are creating anxiety, or if you’d like to review your positioning and diversification, please reach out. We’re here to help you navigate with confidence.

Key Takeaways:

• Policy uncertainty remains, but a pattern of de-escalation after-market reactions has emerged
• Earnings remain strong with seven consecutive quarters of double-digit growth
• Market selectivity around AI spending reflects healthy investor discipline
• Broader leadership across sectors and regions provides a more balanced foundation
• Diversification across your portfolio prepares you for multiple outcomes