Diary of a Portfolio Manager

“Thank you very much, Mr. Roboto
For doing the jobs that nobody wants to
And thank you very much, Mr. Roboto
For helping me escape, when I needed to”

Mr. Roboto, Styx (released in 1983)

Couple things going on today.  Last week, we had our quarterly call with the Global Strategist and I used AI to summarize call.  I am very impressed.  Below is the transcript.  I did nothing other than clean up a bit and added no interpretation.  This is Part 1; Part 2 is some thoughts on recent developments.  

Part 1 Meeting Summary / Meeting Overview

Purpose: Investment market outlook and strategy discussion, focusing on equity market performance, earnings trends, and forward guidance for portfolio positioning.

Date/Time: September 1, 2026

Attendees:

• Jim (Portfolio Strategist/Head of US Strategy equivalent role)

Key Topics Discussed

Market Performance & Breadth Indicators

Major indices have reached new highs in the last month or two, with the exception of China and South Korea. More significantly, breadth measures have also made new highs, in some cases preceding the market itself. Breadth indicators discussed include:

• Advanced decline lines (tracking daily advances minus declines across index constituents)
• Unweighted indexes (removing distortion from large-cap and mega-cap stocks)

The speaker emphasized that strong breadth readings are consistent with a healthy market. Historically, the advanced decline line has shown predictive value, typically peaking months before market tops. Currently, both advanced decline lines and unweighted indexes continue making new highs, which is a positive signal.

Earnings-Driven Market Performance

Earnings have been the primary driver of market gains. Historical analysis (from end of 1945 to present) shows the S&P 500 and earnings have moved in lockstep, with both appreciating approximately 7.3-7.6% annually. The market's recent strength reflects spectacularly strong first-half earnings that exceeded forecasts made at the beginning of the year.

Price-to-earnings (PE) multiples have actually contracted during this rally, declining from approximately 23-24x to closer to 20-21x, despite the market reaching new highs. This occurred because earnings growth outpaced market appreciation. The speaker noted that overvaluation concerns are likely not a significant factor.

Valuation Across Markets

Foreign markets, including the TSX, have also reached new highs. These markets carry PE multiples substantially lower than the S&P 500 and are not significantly above their long-term averages, further supporting the view that overvaluation is not a primary concern.

Forward Earnings Outlook

Consensus forecasts for S&P 500 earnings are approximately $374-$375 per index share for 12 months forward. Historically, one-year earnings forecasts erode by approximately 8% over any 12-month period. The speaker referenced analysis by Laurie Calvascia (Head of US Strategy, RBC) that applies a 10% haircut to consensus, yielding forward earnings of $337.

S&P 500 Price Target & Return Expectations

Laurie Calvascia's 12-month forecast (targeting Q3 next year) projects the S&P 500 at 8,150, representing approximately 6-6.5% capital appreciation plus 1-1.5% in dividends, for a total return of approximately 7%. The speaker characterized this as "higher but not heroic"—a decent gain slightly above long-term average total returns.

Key Assumptions in Forward Forecasts

• US Inflation: Forecast at 3% (RBC Economics forecasts lower, in the low 2s; other analysts forecast even lower toward year-end)
• 10-Year Treasury Yield: Projected at 4.375%
• Fed Rate Hikes: Two hikes anticipated over the 12-month period
• US GDP Growth: RBC Economics forecasts 2.2%; Bloomberg consensus at 2.3%

At GDP growth between 2.1% and 3%, historical S&P 500 returns average around 10%, suggesting mid-to-high single-digit returns are reasonable expectations.

Recession Risk Assessment

No recession is currently forecast by RBC Economics or other major forecasters. The speaker outlined several factors supporting this view:

• Yield Curve: Currently 75-100 basis points away from inversion (using Fed funds rate vs. 10-year Treasury). An inversion would require at least 100+ basis points of Fed rate hikes, which is unlikely in the near term.
• Fed Funds vs. Nominal Growth: Current Fed funds rate is 3.75%; nominal GDP growth is approximately 6.5%. The Fed would need to raise rates significantly to exceed nominal growth.
• Labor Market: Unemployment insurance claims remain extremely low with no signs of deterioration; unemployment rate remains stable.

Risk Factors & Concerns

Despite the constructive outlook, several risks could disrupt the narrative:

• Geopolitical: The Strait of Hormuz situation and potential inflation impacts
• Trade & Tariffs: US trade policy uncertainties
• Political Cycle: Historical propensity for market corrections during US midterm elections
• Bond Market: Potential destabilizing weakness in the bond market
• AI Narrative Disruption: Multiple emerging concerns around AI development:
• • Political pushback in certain states against rapid data center expansion
  • States considering premium power rates for data centers rather than voter rate increases
  • Rising costs of data center infrastructure due to inflation in skilled labor, parts, and critical metals
  • Meta lawsuit affecting a major AI player
  • Two AI models in Europe went rogue and hacked other websites, signaling need for caution
  • Lack of demonstrated profitability increases from AI investments despite widespread integration efforts and expectations

Market Volatility Outlook

The speaker expects a continuation of the uptrend but with a shallower slope and increased volatility. In powerful uptrends (as seen since 2022), volatility is primarily to the upside with brief, sharp pullbacks. Going forward, the market is expected to experience a "bumpier ride" with more time spent in pullbacks while still reaching new highs over the next 12 months.

Decisions Made

• Portfolio Positioning: Maintain invested stance but avoid overcommitment
• Risk Management: Develop defensive strategies regarding how to transition to defensive positioning if market conditions warrant

Risks / Concerns

1. AI Narrative Risk: Multiple emerging issues could disrupt AI investment thesis, including political opposition to data center expansion, rising infrastructure costs, regulatory/security concerns (rogue AI models), and lack of demonstrated profitability improvements despite significant capital deployment.
2. Geopolitical Uncertainty: The Strait of Hormuz situation and potential inflation implications remain unresolved.
3. Trade Policy Uncertainty: US trade and tariff policies present unpredictable risks.
4. Political Cycle Risk: Historical pattern of market corrections during US midterm elections.
5. Bond Market Weakness: Potential destabilizing impact on equity markets.
6. Earnings Forecast Erosion: Consensus earnings forecasts typically erode 8% over 12 months; actual erosion could exceed this, pressuring valuations.
7. Inflation Stickiness: If inflation remains elevated longer than expected, the Fed may be forced into a more aggressive rate hike cycle, pushing Treasury yields above 4.75% or higher, which would pressure equity valuations.
8. Recession Scenario: While not currently forecast, a confluence of negative factors could trigger recession, though current economic indicators do not support this near-term.

Open Questions / Follow-ups

1. Fixed Income Allocation: The meeting referenced fixed income team members and a material maturity held by most fixed income accounts (CR trait), but specific details regarding fixed income strategy, allocation recommendations, or implications were not discussed in the provided transcript. Follow-up needed on fixed income positioning given the equity outlook.
2. Earnings Forecast Accuracy: Unclear whether the 10% haircut applied by Laurie Calvascia to consensus earnings will prove more accurate than the consensus $374-$375 forecast, and what the implications would be if consensus proves more accurate.
3. Data Center Power Costs: Specific states and timeline for implementing premium power rates for data centers are not detailed; impact on AI infrastructure costs and timelines requires clarification.
4. AI Model Security: Details regarding the two AI models that "went rogue" in Europe and the broader security implications for AI deployment are unclear.
5. Defensive Strategy Specifics: The speaker recommended having "plans in place for how you'd get defensive" but did not specify what defensive positions or asset allocations are being considered.

Notes

The overall message is cautiously optimistic: "so far so good, with maybe more good to come, but watchfulness is always called for." The market is supported by strong earnings growth, reasonable valuations, and healthy breadth indicators. However, the path forward is expected to be more volatile and less steep than the powerful uptrend experienced since 2022.

Key nuance: The speaker emphasized that while new highs are likely over the next 12 months, investors should expect a "bumpier ride" with more pronounced pullbacks, requiring defensive positioning strategies and client communication plans. The 7% total return forecast is characterized as solid but not exceptional, suggesting a normalization from the exceptional returns of recent years.

The fixed income team's participation was noted as important given a material maturity held by most fixed income accounts, but their specific commentary was not captured in this transcript excerpt.

Part 2 

What Are We Looking At This Week. The Big Picture: Crosscurrents

Financial markets are once again navigating a mix of familiar risks against a backdrop of resilient global growth.  As summer comes to an end, the global economy remains on relatively firm footing. Business activity surveys continue to point to expansion, with momentum evident across both manufacturing and services. In the U.S., economic growth appears poised to accelerate meaningfully in the third quarter, with annualized real GDP growth potentially exceeding 3%, following a more modest pace of 1.5% in the previous quarter. While this resilience provides a constructive foundation for financial markets, we remain attentive to some risks that could drive intermittent bouts of volatility.

The most immediate concern is the renewed escalation in Middle East tensions, which have pushed oil prices sharply higher, with key benchmarks near or above $100 a barrel. As attacks on energy infrastructure and shipping in the region have intensified, this has raised concerns about the potential for broader disruptions to global energy supplies. A prolonged period of elevated oil prices would in turn feed into higher near-term inflation, potentially putting pressure on central banks to raise interest rates. Financial markets have already begun to reflect some of this uncertainty, with government bond yields generally moving higher this year across major markets and maturities.

Higher bond yields are not necessarily a negative in isolation. They are partly a reflection of an economy that has proven more resilient to a variety of macro shocks than many anticipated in recent years. And at current levels, bond yields also appear broadly consistent with the pace of economic growth. Nevertheless, higher borrowing costs represent a possible headwind that we are monitoring, as they can potentially restrain equity valuations and dampen growth momentum, especially in economies with elevated debt burdens. 

Canada: A Calculated Tariff Response 

Canada’s retaliatory, dollar-for-dollar tariffs took effect earlier this week, marking another step up in the ongoing trade clash with the U.S. As discussed in our previous letter, the longer the Canada-U.S. tariff dispute persist, the greater the risk they pose to consumer spending, business investment, and hiring decisions. Importantly, Canada’s response has been carefully structured and strategic rather than indiscriminate.

Most notably, the latest round of counter tariffs is expected to disproportionately affect politically sensitive U.S. states—including Ohio, Pennsylvania, Michigan, and Wisconsin—that are likely to play an outsized role in determining control of U.S. Congress in the upcoming November midterm elections. By concentrating tariffs on industries and products within more vulnerable Republican districts, Canada appears to be applying targeted political pressure aimed at bringing the Trump administration back to the negotiating table.

The U.S. has since responded with additional tariff threats, creating more jarring headlines, but RBC Economics continues to expect the broader economic impact to remain relatively contained. Canada’s federal government has also introduced several financial support packages for businesses and workers affected by tariffs, which should help mitigate the impact on the most exposed industries.

Given recent escalations, however, we acknowledge that the path forward remains fraught with uncertainty. We expect continued posturing and volatile headlines in the months ahead, but the depth of integration between the two economies suggests to us that a return to the negotiating table remains, in our view, the more likely outcome—even as near-term escalation risk stays elevated.

Takeaway: Pragmatic Optimism

The outlook remains relatively favourable. Economic activity is holding up well, with most indicators pointing to a pace of expansion capable of supporting solid corporate profit growth. At the same time, we believe two risks stand out as potential “speed bumps” for markets. 

Renewed Middle East aggressions have nudged oil prices higher, adding to inflation uncertainty that is complicating the task for central banks as they balance price stability against the risk that higher borrowing costs could slow growth. Disjointed policies from the Trump administration also remain a risk that markets may struggle to price efficiently.

Against this backdrop, we remain focused on disciplined portfolio management, maintaining an appropriate mix of growth and defensive exposures with asset allocation aligned with long-term targets.

Should you have any questions, please feel free to reach out.

J. Todd Kennedy, CIM, FCSI | Senior Portfolio Manager | Kennedy Wealth Management | RBC Dominion Securities Inc. | Phone: 613-566-4582 | Cell: 343-961-3820 | Toll Free: 800-461-1958 | World Exchange Plaza | 45 O’Connor St. Suite 900, Ottawa, ON K1P 1A4 | http://www.toddkennedy.ca

Disclosures

This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities.