July 2026

Deepening conflict in the Middle East has sent oil prices surging and Treasury yields climbing to levels that could soon spill over into the stock market and the broader economy. Simultaneously, a new round of U.S. tariff threats is threatening the outlook. For Canada, the tariff impact will depend on the resilience of companies, the path of the Canadian dollar, and the Bank of Canada’s rate decisions. In July we maintained our twelve-month forward outlook of three months of Stagnation (U.S. Real GDP growth less than 2.5%) followed by nine months of Recession (negative GDP growth) over the next twelve- month period.

China’s economy expanded 4.3% year-on-year in Q2 2026, slowing from 5.0% in Q1.¹ China’s annual inflation eased to 1.0% in June from 1.2% in both April and May,² while China’s unemployment rate edged down to 5.0%.³ China’s trade surplus widened to $125.62 billion in June, up from $113.84 billion a year earlier. China’s trade surplus with the U.S. rose to $28.9 billion in June from $26.02 billion in May.⁴ Eurozone annual inflation was confirmed at 2.8% in June, down from 3.2% in May,⁵ while the seasonally adjusted unemployment rate came in at 6.2% in May.⁶ The Euro Area posted a €7.8 billion trade deficit in May. Among major partners, shipments to the U.S. dropped 13.9%, with exports to China (-2.9%) and Turkey (-14.6%) also down. Imports rose sharply from Brazil (25.4%), the U.S. (17.8%), and the U.K. (13.7%).⁷

The annual inflation rate in the U.S. fell to 3.5% in June, the first decline in five months, as energy prices subsided.⁸ The U.S. unemployment rate dropped to 4.2% in June.⁹ The U.S. trade deficit widened to $77.6 billion in May from a revised $54.6 billion in April, as imports climbed 3.3% to $395.3 billion, their highest level in more than a year. The increase was driven primarily by higher purchases of consumer goods, as well as crude oil and passenger cars. Exports fell 3.2% to $317.7 billion, weighed down by lower shipments of nonmonetary gold and other precious metals.  Ongoing trade policy uncertainty persists as the Trump administration pursues alternative tariff measures and shifts to annual trade reviews with Canada and Mexico.¹⁰ The headline inflation rate in Canada fell to 2.8% in June from 3.2% in the previous month,¹¹ while the unemployment rate eased to 6.5% in June.¹² Canada posted a trade surplus of C$4.24 billion in May, picking up from an upwardly revised C$3.41 billion surplus in the previous month. Exports rose by 0.9%. Foreign sales surged 37% for non-metallic minerals as the war in the Middle East triggered a global supply crunch of sulphur. Exports were also higher for aluminum and alloys (50.7%), offsetting a 2% decline in energy products as oil and gas prices eased. Imports fell by 0.2% to $72.9 billion. The drop was due to a 33% slide in gold, silver, and platinum group metals.¹³

Despite a rocky June characterized by worries about the sustainability of the AI trade and inflation, the S&P 500 gained 15.2% in Q2. The broadening of the rally extended toward smaller caps, with the S&P Mid Cap 400 and S&P SmallCap 600 up 14.5% and 19.7% in Q2, respectively. The S&P/TSX Composite increased 7.0% in the second quarter. Q2 ended positively for European indices, with the S&P Europe 350 up 12.01% on the quarter. Asia Pacific equities rebounded alongside global peers, with the S&P Pan Asia BMI (USD) rising 19.02% during the quarter. South Korea led the rally, with the S&P Korea BMI soaring 73.8% in Q2 (113.3% year to date).

In July we maintained the June asset allocation. Solid earnings growth and AI-related capital expenditure have supported the equities outlook, absorbing higher yields. We will continue to monitor higher bond yields as they boost fixed income’s relative appeal for investment dollars while raising borrowing costs for consumers and companies, slowing the economy and weighing on equities. Gold is held across all models as a geopolitical risk hedge. Gold’s historical performance during times of crisis, portfolio diversification, and inflation hedging are also key factors for central banks to hold and add to their gold reserves.

Inflationary pressures remain broad and persistent as energy prices have surged higher in the back half of July. Tariffs are back in play as the U.S. administration has indicated it intends to apply new tariffs across dozens of countries as temporary global tariffs expire at the end of July. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

Drew Millard, Portfolio Manager

¹ Trading Economics. China GDP. July 15, 2026.

² Trading Economics. China Inflation. July 9, 2026.

³ Trading Economics. China Unemployment. July 15, 2026.

⁴ Trading Economics. China Trade. July 14, 2026.

⁵ Trading Economics. EU Inflation. July 17, 2026.

⁶ Trading Economics. EU Unemployment. July 2, 2026.

⁷ Trading Economics. EU Trade. July 16, 2026.

⁸ Trading Economics. U.S. Inflation. July 10, 2026.

⁹ Trading Economics. U.S. Unemployment. July 2, 2026.

¹⁰ Trading Economics. U.S. Trade. July 7, 2026.

¹¹ Trading Economics. Canada Inflation. July 20, 2026.

¹² Trading Economics. Canada Unemployment. July 10, 2026.

¹³ Trading Economics. Canada Trade. July 7, 2026.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. June 30, 2026. Index performance is based on total returns and expressed in the local currency of the index.