Canada: Resilience Amid Adjustment

Trade Tensions Rattle Markets—But Diversification Accelerates

Canada's trade relationship with the U.S. continued to dominate the economic conversation in September. After trade negotiations broke down, Canada implemented 15%, 25% and 50% counter-tariffs covering approximately $27.6 billion of U.S. imports. RBC Economics estimates that, if the measures persist, the combined impact of U.S. tariffs, Canadian counter-tariffs and government support could leave Canadian GDP approximately 0.2% lower than otherwise.

What This Means: While tariffs create near-term pressure for trade-exposed companies, they are also accelerating supply-chain diversification and investment in domestic industries—creating both risks and opportunities for portfolios with exposure to industrials, energy and critical minerals.

(New U.S. tariff retaliation: What it means for Canada’s economy - RBC Economics)

Canada's EU Pivot Opens a New Strategic Door

Canada's efforts to diversify gained significant momentum this month. Prime Minister Mark Carney and European leaders discussed deeper cooperation in trade, critical minerals, energy, artificial intelligence and defense. European Commission President Ursula von der Leyen even floated the idea of Canada becoming the EU's first "associate member"—although such a status does not currently exist and would require formal negotiations with all EU member states.

Why It Matters: Canada has a compelling opportunity to leverage its natural resources, energy and critical-mineral base to build stronger relationships beyond its traditional U.S. market. This diversification could offset tariff headwinds and position Canada as a key supplier for the global energy transition and AI infrastructure buildout—a multi-year tailwind for investors positioned in commodities, utilities and tech infrastructure.

(Prime Minister of Canada -- Prime Minister Carney Delivers Address to European Parliament)

The Bank of Canada's Balancing Act: Tariffs, Inflation & Growth

The Bank of Canada held its policy rate at 2.25% in September, signaling a conditional pause. However, the central bank faces a trilemma that will define monetary policy through year-end:

• Tariffs → Weaker Growth: Trade tensions risk momentum even as Q2 GDP rebounded after earlier contractions
• Higher Energy Prices → Higher Inflation: Resurgent oil prices have pushed headline CPI upward; RBC now forecasts Canadian headline CPI ending 2026 near 3% (up from 2.5% in August), though core inflation remains contained
• Labor Market Momentum → Growth Support Needs: Despite robust job gains through August, consumer credit strain and potential softness ahead warrant a measured approach.

Portfolio Implications: The BoC will likely deliver modest rate hikes into Q4 2026, but at a slower pace than the Fed. This creates opportunities in both equities and fixed income as investors reassess valuations. Equity-driven household wealth gains continue to support domestic consumption, a key positive for consumer and discretionary sectors. However, rising rates will pressure yield-sensitive stocks and highly leveraged companies.

(BoC and Fed to hike from different starting points - RBC Economics)

United States: Strength Meets Inflation Concerns

Diplomatic Stability Emerges Amid Political Uncertainty

Chinese President Xi Jinping's September 23-25 state visit to Washington yielded modest but meaningful agreements with President Trump, including the establishment of formal U.S.–China Boards of Trade and Investment. Both countries extended their trade truce by ~2 months, agreed on favorable tariff treatment for $30 billion in non-sensitive goods, and launched a formal dialogue on artificial intelligence governance. China also committed to importing 10 million metric tons of U.S. coal annually through 2028, supporting domestic energy sectors.

Investor Takeaway: While midterm election volatility dominates headlines, the renewal of institutional U.S.-China engagement frameworks provides a counterbalance for multinational corporations and energy exporters. Expect continued high-level diplomatic momentum through APEC (November) and G20 (December) summits, which could reduce near-term trade and tariff uncertainty for equities exposed to China.

(RBC Wealth Management / Portfolio Advisory Group -- Midterm Mindset Seeping into the U.S. Stock Market)

Midterm Election Outcomes Reshaping Sector Valuations

As November's midterm election approaches, political uncertainty is beginning to weigh on market sentiment. RBC Capital Markets equity analysts have assessed potential impacts across S&P 500 sectors based on different congressional control scenarios. If Democrats gain full control of both chambers, equities face modest headwinds overall, with particular pressure on Energy (-0.67), Financials (-0.40), and Utilities (-0.50). A divided government scenario shows neutral impacts, while Republican control remains modestly positive.

What This Means: Election outcomes matter less than investors might think for long-term equity returns. However, sector-specific risks are real in the near term. Energy and Financials face regulatory uncertainty under Democratic control, while Consumer Staples could see modest support. Investors should focus on positioning defensively in rate-sensitive sectors while maintaining exposure to sectors with durable cash flows regardless of political outcomes.

(The White House -- President Trump Advances a Fair and Reciprocal Relationship with China)

AI Investment Remains the Differentiator

AI continues to drive enormous investment in semiconductors, data centers, cloud infrastructure and electricity capacity. Importantly, AI investment is now large enough that economists are considering its impact on overall economic growth and productivity — not just technology-company earnings. The Fed and other central banks are increasingly discussing AI investment as a contributor to demand.

Investor takeaway: The opportunity is expanding beyond AI software. The infrastructure required to build and power AI could create a broader investment cycle across technology, energy and industrial companies

(September Executive Briefing: What to watch in the final quarter of 2026 - RBC Economics)

Global Economy: Energy Geopolitics Reshape Supply & Valuations

Oil Above $100 Signals Structural Shift

Brent crude surged past $100/barrel in September as Middle East supply disruptions persisted. Unlike 2022, when energy prices spiked due to Russian invasion fears, this move reflects genuine supply constraints with no near-term fix. Here's the split this creates:

Winners:

• Canadian energy producers (geopolitical premium + cash-flow yields)
• Gold (investors hedging inflation and geopolitical risk)

Losers:

• Airlines, shipping, chemicals, fertilizer producers (all facing margin compression)
• Lower-income consumers (already stressed on credit)

The Opportunity: Energy isn't just a commodity bet anymore—it's a geopolitical lever and a cash-flow story. Disciplined producers returning capital to shareholders at these prices offer inflation protection and yield in a higher-rate world.
(Energy Shock: 8 charts that explain the global oil and gas fallout - RBC Thought Leadership)

Important Reminders

October Tax Planning Reminders:

If you expect to have significant tax deductions on your tax return next year, consider applying to the CRA now for a tax waiver on Form T1213, Request to Reduce Tax Deductions at Source to reduce withholding taxes at source on your employment income.
(T1213 Request to Reduce Tax Deductions at Source - Canada.ca)

The RBC Charitable Gift Program is designed to make it easy to support charitable causes that are important to you, while potentially receiving significant tax advantages. Use the link below to see how the program works.

(Charitable-Gift-Program.pdf)