Macro Volatility

Policy unpredictability remains a defining feature of the current U.S. administration, although a consistent pattern has emerged in both trade and geopolitical policy: 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 seems to be unfolding in the Middle East. Renewed military exchanges have driven oil prices and bond yields considerably higher, but intermittent pauses in hostilities have revived hopes that diplomatic efforts will resume. Meanwhile, new U.S. tariff proposals have resurfaced.

One risk of this recurring “escalate, de-escalate” approach is that investors may become conditioned to expect eventual policy reversals. If investors begin to look through initial announcements, market reactions could become less pronounced, reducing pressure on the U.S. administration to change course. Nevertheless, we continue to view de-escalation in the Middle East as the most likely outcome, though it is unlikely that the path will be smooth. While these recurrent shocks will test the economy’s resilience, underlying fundamentals remain reasonably constructive. Recent data continues to point to global growth of around 3%, somewhat slower than last year’s pace, but still a healthy environment capable of sustaining corporate earnings growth.

Earnings Face Expectations

Earnings season is well underway in the U.S., with over half of S&P 500 companies reporting Q2 results by the end of this week. To date, U.S. companies have comfortably exceeded expectations. If the current earnings growth rate for the index holds, it would mark seven consecutive quarters of double-digit expansion and second quarter earnings growth exceeding 20%. Strength has also been evident outside the U.S., with Canadian and global earnings growth tracking near the upper end of their post-pandemic ranges.

In our previous blog, we noted that elevated earnings optimism increased the likelihood that mere on-target earnings results may underwhelm, particularly among AI-related companies. This dynamic has been playing out so far. Demand for AI infrastructure remains strong, and recent results continue to provide evidence that spending is translating into tangible returns. Despite this, market reactions suggest that investors are becoming increasingly selective, more willing to reward companies where AI investments are generating visible returns, and applying much greater scrutiny to businesses for which capital spending continues to outpace near-term profitability.

Broader Market Leadership

AI-related companies remain key contributors to earnings. Technology is still one of the top performing sectors in the U.S. this year. More recently, however, its market leadership has taken a backseat. Over the past two months, Health Care and Financials have led while eight of the eleven S&P 500 sectors have also advanced. Encouragingly, international market indices remain near recent highs despite this shift in leadership.

Market performance has also broadened geographically. Even after a pullback from June’s record highs, emerging market equities remain the strongest-performing region, returning roughly 15% year-to-date at the time of writing. International developed markets have returned about 14%, followed by Canada at roughly 13% and U.S. equities about 12%. Broader participation across sectors and regions provides a more balanced foundation for equity returns than one driven by a narrow group of companies.

Takeaway

We remain constructive about the outlook for equities and other risk assets. The economic expansion is intact, while earnings trends imply broadening strength across sectors and regions. At the same time, several risks contributing to bouts of volatility continue to warrant attention, including commodity price swings, inflation uncertainty, shifts in AI-related sentiment, and evolving U.S. policymaking. We remain committed to a balanced approach to portfolio management, prioritizing diversification across sectors, regions and asset classes to prepare for a wide range of outcomes.

If you have any questions, please do not hesitate to contact us.

Drew M. Pallett LL.B.

Senior Portfolio Manager and Investment Advisor 

RBC Dominion Securities 

Email: drew.pallett@rbc.com