I have recently returned from the Brooks Range in Alaska, where I was fortunate to spend an extended period in the wilderness with my son. I had hoped the markets might observe my out-of-office notice and remain quiet in my absence. Predictably, they did not. Since my last commentary on July 30th, there has been no shortage of activity for investors to absorb.
The intervening period has brought renewed uncertainty around CUSMA, Canadian retaliatory tariffs, a more complicated Bank of Canada message, stronger US economic data, sticky inflation risk, a possible turn in Federal Reserve policy, and another move higher in long-term bond yields. Beneath those headlines, the broader story is that the global economy continues to absorb shocks better than expected, while the interest rate and policy backdrop has become less forgiving.
Investors are therefore dealing with a more nuanced environment than the daily headlines suggest. Growth has slowed in some areas, but it has not broken. Labour markets have cooled, but they have not collapsed. Inflation has improved from its peak, but it has not fully returned to a comfortable target-consistent path. Central banks do not want to over-tighten into pockets of weakness, but they also cannot declare victory too early.
Canada: Resilient, But Still Constrained
In Canada, the economic picture remains mixed. Real GDP grew at a 3.3% annualized pace in the second quarter, supported by household consumption, residential investment, and trade. The details were better than the headline in some respects, particularly given the contribution from domestic demand. However, that strength should not be extrapolated too aggressively. July GDP appears to have stalled, some of the second-quarter strength reflected temporary factors, and trade uncertainty remains a meaningful headwind.
Tariffs: The Bigger Risk is Uncertainty
The CUSMA issue is important, but not necessarily in the way headlines suggest. The direct inflationary impact from Canada’s retaliatory tariffs should be modest. Experience suggests that firms often absorb some of the tariff cost through margins, especially when demand is soft. The larger risk is uncertainty. Businesses are less likely to commit capital, hire aggressively, or make long-term supply chain decisions when the rules of trade are unclear. Uncertainty itself becomes a tax on investment and confidence.
Canada also faces structural challenges that are easy to overlook when focusing on monthly data. Lower immigration is slowing population growth, which weighs on consumption and housing demand, but also limits labour supply. Productivity remains weak. Business investment is being held back by trade uncertainty. Housing is still adjusting to earlier rate increases, changing rental dynamics, and lower population growth. Government infrastructure spending may help over time, but it is unlikely to fully offset these headwinds in the near term.
For the Bank of Canada, the message has become more complicated. The Bank sounded more hawkish at its latest meeting and has clearly reopened the door to future rate hikes. Every meeting should now be treated as live. At the same time, the labour market does not yet make a compelling case for urgent tightening. Employment fell in August, and wage growth has slowed. The Bank may want to normalize policy eventually, particularly if inflation proves sticky, but the bar for more than modest tightening remains high given Canada’s softer domestic backdrop and ongoing trade uncertainty.
The U.S.: Firmer Growth, Stickier Inflation
The United States looks firmer. Payrolls rebounded in August, third-quarter growth is tracking well, and the AI capital spending cycle continues to support business investment. The US consumer is not as strong as it was, and housing remains constrained by elevated mortgage rates, but the broader economy has retained more momentum than many expected.
AI: More Than a Market Theme
AI is central to that story. It is not just an equity-market theme. It is increasingly a macro theme. The AI buildout is supporting US business investment, high-tech manufacturing, semiconductor demand, data-centre construction, power infrastructure, and global trade flows. This helps explain why the global economy has remained resilient despite higher energy prices, tariffs, and tighter financial conditions.
It also complicates the trade story. Tariff risk and CUSMA uncertainty are real drags, but AI-related hardware is highly trade-intensive. Global trade has been supported by shipments of semiconductors, servers, components, memory, cooling systems, and related equipment. Asian exporters and Mexico have been important beneficiaries. Globalization is not simply reversing; it is being reshaped. Some trade channels are being disrupted by politics, while others are being accelerated by technology.
That is an important counterpoint to the prevailing tariff narrative. Trade policy is becoming more fragmented and more political, but trade volumes do not automatically weaken across the board. The AI investment cycle requires physical infrastructure, not just software. It requires chips, equipment, electricity, data centres, and supply chains that cross borders. The market is therefore dealing with two forces at once: political efforts to constrain trade and technological forces that continue to demand it.
For markets, the AI theme remains both an opportunity and a risk. Earnings growth among the largest technology companies has been remarkable, and the profit contribution from a narrow group of firms is real. That helps justify some of the market leadership we have seen. But concentration is still concentration. When a small number of companies account for a large share of index earnings and returns, portfolios become more dependent on a narrower set of outcomes.
The right conclusion is not simply to avoid technology. The earnings are too important, and the capital spending cycle is too central to the macro outlook. But investors should be careful not to confuse a powerful theme with a risk-free one. Valuations, margin expectations, capital intensity, competition, and eventual cyclicality still matter. AI optimism may continue to provide support in the near term, but exposure should be intentional, diversified, and sized with an understanding of the concentration risk embedded in broad equity indices.
Policy Divergence and The U.S. Dollar
The Federal Reserve now faces a different challenge than it did earlier in the summer. The debate has shifted from whether the Fed is finished tightening to whether additional rate hikes may be required. The labour market is not overheating, but downside risks have faded. Inflation has improved, but the path back to target is not assured. Energy prices, goods prices, and survey-based measures of pricing intentions all suggest that inflation pressure may be more persistent than markets hoped.
The timing of the next move remains uncertain, but the direction of the debate has changed. Additional Fed tightening increasingly looks like a question of when, not if, provided the inflation data cooperate. If growth remains firm and inflation settles closer to 2.5% than 2%, the Fed may need to tighten further. That could support the US dollar and place additional pressure on shorter-term yields.
Policy divergence is becoming more important. The Fed may be moving closer to tightening again, while the Bank of Canada is more constrained. The Bank of Canada may sound hawkish, but Canada’s weaker labour market, tariff uncertainty, and more fragile domestic demand make near-term hikes harder to justify. The US, by contrast, has stronger growth momentum and a clearer AI-driven investment tailwind. For Canadian investors, this divergence matters. It affects currency returns, relative equity performance, bond yields, and the role of US-dollar exposure in diversified portfolios.
A stronger US dollar would not be surprising in that environment. Stronger US data, a potentially more hawkish Fed, and less tightening pressure in other major economies all point in that direction. For Canadian investors, currency can either add to or subtract from foreign asset returns. Currency exposure should not be treated as an afterthought, especially when policy paths are diverging.
Bonds: A Repricing, not a Panic
Global bond markets are also reflecting this more complicated environment. The rise in long-term yields is not a crisis, but it is meaningful. Investors are demanding more compensation for fiscal deficits, inflation uncertainty, geopolitical risk, and reduced confidence in policy frameworks. This is not simply about one inflation print or one central bank speech. It is about a broader repricing of term premia.
The pre-pandemic bond market regime was defined by weak growth, persistent disinflation, heavy central bank bond buying, and very low term premia. That world has changed. Governments are borrowing more, central banks are no longer the same marginal buyers, inflation risk is less predictable, and geopolitical shocks are more frequent. Some of the recent rise in yields may reverse if energy prices settle or growth cools, but I would be cautious about assuming that long-term yields simply return to the old regime.
The key question is whether higher yields become disorderly. So far, the answer appears to be no. Credit spreads remain contained, equity markets have held up, and the move has been concentrated in parts of the curve that are less directly tied to household and corporate borrowing costs. But long-term yields bear watching. A further sharp move higher could tighten financial conditions, pressure valuations, weigh on housing, and expose vulnerabilities in highly leveraged areas of the market.
Energy and Geopolitics
Energy and geopolitics remain central to the outlook. The global economy has handled higher energy prices better than expected, supported by savings buffers, government measures, and the AI investment cycle. The risk, however, is asymmetric. If energy prices rise further or remain elevated for longer, inflation could prove stickier and central banks could be forced to keep policy tighter.
The Iran and Strait of Hormuz backdrop is a reminder that inflation risk is no longer just a domestic labour-market story. Supply shocks can still matter. Energy costs filter through transportation, goods, services, food, and household expectations. Even if central banks look through the first-round impact, they cannot ignore the risk that repeated shocks become embedded in broader pricing behaviour. That helps explain why policymakers are reluctant to sound too confident.
Canada Life Investment Management Portfolio Implications
From a portfolio perspective, this remains an environment for balance and selectivity rather than a major directional bet. We continue to maintain a modest pro-risk stance, with equities preferred over fixed income, but with less conviction than earlier in the year after the strong run in markets. As always, portfolio positioning should reflect each portfolios objectives, risk tolerance parameters, time horizon, and liquidity needs.
Within equities, we remain most constructive on the U.S. relative to Canada and EAFE. The U.S. continues to benefit from stronger relative growth, deeper capital markets, and the AI investment cycle. While AI-related leadership has broadened and performance gaps have narrowed, the U.S. remains the clearest expression of the growth and innovation themes currently supporting global markets.
Canada remains more challenged. Domestic growth is softer, business investment is still constrained by trade uncertainty, and CUSMA renegotiation risk remains an overhang. We are not abandoning Canadian exposure, but we believe a more cautious relative position is warranted until there is better visibility on trade policy, productivity, and the domestic growth outlook.
EAFE remains neutral. Opportunities across Europe and Asia-Pacific are mixed, and the region remains more exposed to energy and food price shocks. Select opportunities exist, but we do not see EAFE as the primary tactical expression at this stage. Emerging markets remain worth monitoring, particularly given AI-related supply chain activity and regional valuation differences, but we are not using EM as the main way to express our current tactical views.
Implementation matters. As a multi-asset team, we are not attempting to select individual AI winners or make narrow security calls. Instead, we prefer to express our views through mandates, regional allocations, investment styles, factor exposures, and manager selection. In equities, that means maintaining exposure to strategies that can participate in durable earnings growth while managing concentration, valuation, and factor risk. Broad equity indices may already carry more AI and large-cap technology exposure than investors realize, so the question is not simply whether to own the theme, but how much exposure is appropriate within a diversified portfolio.
We also believe portfolios should remain balanced across investment styles. Growth-oriented mandates continue to have a role, particularly given the AI and U.S. earnings backdrop, but quality, dividend growth, low-volatility, and disciplined value exposures can help provide ballast if rates remain elevated or markets become less forgiving of weaker balance sheets and speculative earnings assumptions.
In fixed income, bonds again provide income and diversification, but duration should be managed carefully. Long-term yields offer more value than they did in the past, yet remain vulnerable to fiscal concerns, inflation uncertainty, and term premium repricing. We prefer flexibility across duration, credit quality, and regional fixed income exposure rather than relying on a single fixed income lever.
We also see merit in foreign fixed income relative to Canadian fixed income. Canada faces a softer domestic growth backdrop and ongoing trade uncertainty, while global fixed income markets provide broader opportunities to manage duration, currency, credit, and regional exposure. Credit selection remains important, as spreads are not pricing in a severe downturn and leave less margin for error. Higher-quality credit remains more attractive than lower-quality areas where investors may not be adequately compensated for economic or refinancing risk.
For Canadian investors, geographic and currency diversification remain important. Policy divergence between the Fed and the Bank of Canada could support the U.S. dollar, and currency exposure can materially influence foreign asset returns. This reinforces the value of maintaining diversified exposure across regions, sectors, currencies, and asset classes.
The challenge is to avoid being pulled too far in either direction by the headlines. CUSMA uncertainty, tariff announcements, central bank speeches, and bond market volatility will continue to move markets in the short term. The underlying backdrop is more balanced: the global economy remains resilient, inflation is not fully defeated, central banks are regaining a tightening bias, and bond markets are repricing a riskier fiscal and inflation environment.
That is not a crisis backdrop, but neither is it one that rewards complacency. It is an environment for disciplined diversification, quality, liquidity, and patience.
Sincerely,
Corrado Tiralongo (he/him)
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management Ltd.
The views expressed in this commentary are those of Canada Life Investment Management Ltd. as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their financial security advisor for advice based on their specific circumstances.
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