DIARY OF A PORTFOLIO MANAGER

Financial markets continue to navigate competing forces from corporate earnings, investor sentiment and economic data.

Tech Stress

Artificial intelligence (AI), a key driver of equity market trends, has recently been a source of volatility. Across the technology sector, concerns about AI-related disruption alongside rising expectations for tangible returns on AI spending have led to sharp share price swings in both U.S. and Canadian markets.

Within Big Tech, a small group of dominant firms has accounted for a disproportionate share of market gains in recent years. Capital spending on AI infrastructure among these companies has continued at an exceptional pace. As investment ramps up, however, investors are becoming more discerning, placing greater emphasis on how and when these investments will translate into profits. Despite near-term uncertainty, these firms generally remain financially strong, supported by cash-rich balance sheets, reliable cash flow generation and durable business models.

In software, the rapid rollout of more capable AI tools has heightened scrutiny around competitive disruption, leading to downward pressure on share prices—even for firms where earnings results were positive during the latest reporting season. Uncertainty about how AI could impact profit margins, barriers to entry, and intensify competition have weighed heavily on sentiment. While valuations now reflect some of this disruption risk, and recent tech selling pressure appear more sentiment-driven than fundamentals-based, it will likely take some time for software companies to restore investor confidence in the long-term resilience of their businesses.

We remain constructive on the AI theme over the long term (with a cautious lens and a bias towards real businesses with real revenue) but recognize that transformative technologies often bring periods of volatility and elevated uncertainty.

Canadian Labour Market

The Canadian economy lost 25,000 jobs in January, marking the first decline in five months following a strong run of employment gains last fall. Weakness was concentrated in Ontario manufacturing, an area particularly exposed to U.S. trade policy. Despite the job losses, the unemployment rate unexpectedly fell to 6.5% from 6.8%, largely because fewer people were actively seeking work. Encouragingly, worker discouragement remained minimal, suggesting that fewer job seekers reflected demographic factors rather than worsening economic conditions. Furthermore, job losses in January were driven by part-time roles, while full-time positions and total hours worked both rose, indicating steady demand for labour.

Although job losses alongside falling unemployment may seem puzzling, this dynamic may become more common in 2026. Canada’s population growth has slowed sharply as the government has reduced immigration targets―January saw a record-low increase of just 5,000 people. Combined with ongoing retirements, fewer workers are entering the labour force, meaning fewer job gains are needed to keep the unemployment rate stable. The result may be a labour market that looks soft in headline numbers but remains fundamentally sound.

Takeaway

Recent market volatility across tech-related sectors underscores investor uncertainty surrounding AI monetization and the potential for disruption to established business models. While near-term sentiment may remain fragile, we believe a disciplined investment approach―with an emphasis on quality and diversification―remains well suited to navigating this environment.

A range of developments continues to shape the investment landscape, with potential implications for the macro outlook.

Enjoy the rest of your week!

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.