Good day everyone.

I hope you are all doing well and have enjoyed your summer!

As I’m sure you are aware, portfolio performance continues to be quite strong despite ongoing geopolitical turmoil. How is this possible? If I were to give only one short answer, it would be that earnings growth (or earnings per share, EPS) continues to be above average, as it was last year.

Earnings growth of a company, or the year over year rate of change in a company’s profit, tends to significantly determine the direction of that company’s stock price. While geopolitics can sometimes cause short term volatility in the stock market, it is the fundamentals, such as earnings growth, that drive the long-term trends in the stock market.

On that note, below is an excerpt from an article recently published by one of the institutional level equity managers that we use for managing our Canadian dividend income equity exposure, Connor, Clark & Lunn. As such, this article has a Canadian focus, enjoy!

Connor, Clark & Lunn

Q2 2026 CANADIAN EQUITIES OUTLOOK: NAVIGATING OPPORTUNITIES IN THE SECOND HALF - JULY 30, 2026

STRONG QUARTER DRIVEN BY EARNINGS GROWTH

Canadian equities delivered another strong quarter, with the S&P/TSX Composite Index gaining approximately 7%

during the second quarter and more than 11% year-to-date. Better-than-expected corporate earnings across the

banking, energy and technology sectors, easing geopolitical tensions following the April ceasefire, continued enthusiasm

surrounding artificial intelligence (AI), and the resilience of the U.S. economy all contributed to market strength.

Unlike many recent market rallies that have been driven primarily by expanding valuations, corporate earnings have

been the primary driver of returns, providing a healthier and more sustainable foundation for equity markets.

CANADIAN BANKS CONTINUE TO LEAD

Financials were once again the standout sector, with Canadian banks delivering their strongest quarterly

performance since 2009 and accounting for a significant portion of the TSX's gains. Approximately 15% year-over

year earnings growth, strong domestic and international investor demand, and record levels of foreign ownership all

supported the sector's performance. Investors also continued rotating toward businesses benefiting from

improving earnings fundamentals while reducing exposure to sectors viewed as more susceptible to AI-related

disruption, including select software companies and telecommunications.

Despite the sector's strong performance, Canadian banks remain well positioned as improving earnings fundamentals

continue to support valuations.

COMMODITY MARKETS MIXED WHILE STRUCTURAL THEMES CONTINUE TO OUTPERFORM

Resource-oriented sectors experienced a more challenging quarter as easing geopolitical tensions reduced pressure on

commodity prices. Gold and energy stocks underperformed amid lower oil prices, rising real interest rates and a stronger

U.S. dollar.

At the same time, companies benefiting from long-term structural growth themes, including AI infrastructure,

defence spending and rare earth production, continued to outperform, reinforcing the strength of these durable

investment trends.

CONSTRUCTIVE OUTLOOK FOR THE ECONOMY

The outlook for both the U.S. and Canadian economies remains constructive over the coming year.

In the United States, continued investment in AI infrastructure, defence and capital spending, together with

supportive fiscal policy, healthy labour markets and resilient consumer spending, is expected to support real GDP

growth of approximately 2%, providing a favourable backdrop for corporate earnings.

While Canada recently experienced a technical recession, the slowdown appears to have been largely temporary,

influenced by tariff-related distortions and difficult year over-year comparisons. Economic activity has already begun

to improve, while Canada's resource-rich economy, stable political environment, government focus on economic

development and attractive relative valuations continue to support a positive medium-term outlook. Taken together,

these factors suggest Canadian equities remain well positioned to outperform over time.

EARNINGS REMAIN THE KEY DRIVER OF RETURNS

The outlook continues to be centred on earnings growth rather than further valuation expansion. Nominal GDP

growth, productivity gains from AI adoption, continued margin expansion and healthy corporate fundamentals are

expected to support earnings growth across many sectors.

Although valuations for large-cap equities are above long term averages, they remain reasonable if companies

continue delivering on earnings expectations. Small- and mid-cap Canadian equities appear particularly

attractive, with valuations still below historical norms while benefiting from many of the same long-term

structural growth themes.

KEY RISKS TO MONITOR

While the overall outlook remains constructive, two key risks warrant close attention.

The first is inflation. A renewed increase in oil prices or an escalation in geopolitical tensions could reignite inflationary pressures,

delaying or reversing anticipated central bank rate cuts. A higher interest rate environment would likely place

pressure on equity valuations.

The second is the pace and return on AI-related capital spending. Technology companies continue to invest

heavily in AI infrastructure, and investor expectations remain elevated. Should productivity gains or earnings

growth fail to materialize as anticipated, or if AI investment slows meaningfully, market volatility could increase.

Investor sentiment also remains optimistic, leaving relatively little room for disappointment should

expectations not be met.

As always, please do not hesitate to reach out to me should you have any questions or concerns.

All the best, Evan

Evan Thompson | Senior Investment & Wealth Advisor

Thompson Wealth Management | RBC Wealth Management | RBC Dominion Securities Inc. 

T. 403-341-8884 | T. 1-800-663-6087| F. 403-341-8887 | www.thompsonwealthmanagement.ca | 300, 4900 - 50 Street, Red Deer, AB T4N 1X7

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