Quarterly report: Q2 2026

Performance ending June 30, 2026. Sources: Morningstar Direct, Bank of Canada and U.S. Department of the Treasury.

Markets adapted to uncertainty

Stock markets rebounded in the second quarter, recovering Q1 losses and returning to record highs.

Ongoing tension in the Middle East defined market performance throughout the quarter, shaping investor sentiment on a near-daily basis. Markets were highly sensitive, rallying on signs of de-escalation and pulling back when risks intensified.

In mid-April, the S&P 500 and the Nasdaq returned to record levels, with the Nasdaq delivering its longest winning streak since 2009. Strong corporate earnings and improving confidence around a potential U.S-Iran peace deal carried momentum, helping markets recover conflict driven losses. All three Wall Street benchmarks were back in positive territory on a year-to-date basis by April 17.

Gains continued through May, with the S&P 500 rising roughly 10% year-to-date and the Nasdaq advancing more than 16%, driven by strength in the tech sector. By late May, the Dow also notched its first record close since February. Canada’s TSX hit its own record high in late May and surpassed the 35,000-point level for the first time (on June 2), supported by energy, materials and financials.

An interim agreement between the U.S. and Iran in mid-June eased geopolitical tensions, lowering oil prices and supporting periodic rebounds in global equity markets. While rising interest rate expectations and concerns about Big Tech valuation triggered pull-backs late in the quarter, overall Q2 remained a strong period for markets.

Geopolitics and rising inflation tested markets

Markets faced repeated bouts of volatility, particularly later in the quarter, as expectations for higher interest rates mounted and large-cap technology shares experienced renewed selling pressure. Sharp, short-lived sell-offs, like the one in early June, became a recurring feature.

Oil prices moved in a clear pattern. Higher spikes weighed on equity markets and reinforced inflation concerns, while declines supported rallies by easing pressure on costs and growth expectations. In late June, oil prices fell amid easing geopolitical tensions and a stronger U.S. dollar, contributing to renewed volatility in energy and materials sectors. In Canada, the annual inflation rate rose from 2.4% in March to 2.8% in April, before surging to 3.2% in May. In the U.S., inflation climbed above 4% by May, its fastest pace in nearly three years. In both economies, higher energy prices drove the increase. Crucially, measures of core inflation, which exclude energy and other volatile components, remained more stable – although late-quarter data indicated price pressures were broadening to food and technology-related inputs, reflecting ongoing supply constraints and strong demand linked to AI infrastructure.

Different drivers, similar outcomes

Both Canadian and U.S. equity markets posted gains during the second quarter, but the sources of those gains differed in important ways.

In Canada, energy, materials and financials drove performance. Higher oil prices and stronger commodity demand contributed to gains in resource-based industries, while Canadian banks delivered solid earnings growth. At the end of the quarter, declining commodity prices created headwinds for Canadian markets, particularly in the energy and materials sectors.

In contrast, U.S. market performance primarily depended on the technology sector. Strong earnings from large-cap technology firms, along with continued enthusiasm around artificial intelligence, supported gains in the S&P 500 and Nasdaq. The U.S. economy also demonstrated greater resilience, with steady job creation and ongoing consumer spending. By late June, however, the technology sector faced increased pressure, as rising interest-rate expectations and valuation concerns led to a pull-back in several mega-cap and semiconductor-related stocks.

Q: Canada received mixed economic signals in Q2, from a technical recession to improving employment to rising inflation. What should investors take away from this data?

A: Canada slipped into a shallow recession after GDP shrank two quarters in a row. But a lot of that weakness came from one-time disruptions, like a spike in gold imports and auto plant shutdowns, not from deep underlying problems.

On the flip side, wages have been rising faster than inflation and prices are not out of control. Canada's core inflation is sitting just above the Bank of Canada's 2% target.

What does this mean for interest rates? The Bank of Canada has held its rate steady at 2.25% in 2026. Economists widely expect rates to remain unchanged for the rest of the year. That is good news for the economy and should be treated as a sign of stability, not cause for alarm.

Q: Beyond the headlines, what factors drove market performance in the first half of 2026. Could any shape markets over the next 6 to 12 months?

A: A few important — but less talked about — forces helped shape markets this year, and they matter for what comes next.

First, the AI story is changing shape. It’s no longer just about software and tech giants. Real investment is now flowing into the physical world, such as power plants, data centres, cables and industrial equipment. That means the opportunity is spreading to sectors most investors would not traditionally think of as “tech.”

Second, company earnings have been surprisingly strong across many industries, not just technology, and that has helped keep stock markets steady.

Third, global trade is being quietly rewired. Countries and companies are moving away from depending on one or two trading partners, and that shift is creating new winners and losers across different regions and sectors.

Looking ahead, smaller companies, value-oriented investments and markets outside the U.S. could start to perform better than they have recently as the gains become less concentrated in a handful of very large tech stocks. A well-diversified portfolio is well-positioned to benefit from exactly that kind of shift.