Financial Letter - First quarter 2026

The first quarter of 2026 once again illustrated the financial markets’ sensitivity to geopolitical shocks and abrupt changes in the macroeconomic environment. After cautious optimism amid strong performances at the start of the year, the quarter ended in a much more uncertain mood when the Middle East conflict escalated and energy prices soared. 

In January, the markets advanced on a relatively stable economic outlook, despite a notable rise in geopolitical tensions, particularly in Latin America with the U.S. intervention in Venezuela and the arrest of its President, Nicolás Maduro. In February, the environment became more complex owing to uncertainty over trade policies and sweeping structural changes caused by artificial intelligence. But the quarter changed dramatically in March, when the Iran War escalated and the closure of the Strait of Hormuz set off an energy shock.

The disruption of global oil and gas flows caused energy prices to spiral, reviving inflationary fears and changing monetary policy expectations globally. Equity markets reacted negatively to the shock, although the losses were partially offset at the end of the period, when the conflict appeared to be easing. 

For the quarter as a whole, equity returns were mixed. In Canada, the S&P/TSX Index advanced 3.9%. In contrast, the U.S. market retreated, with the S&P 500 Index down 2.6% in Canadian currency (-4.3% in local currency). International developed markets edged up 0.7% in Canadian dollars (0.3% in local currencies), while emerging markets rose 1.7% in Canadian dollars (2.2% in local currencies). 

As for fixed income, the Canada Universe Bond Index returned a modest 0.23% on the quarter. The bond markets were affected by opposing forces: expectations of an economic slowdown, which supported demand for bonds, and rising energy prices, which revived inflation fears and put upward pressure on yields at the end of the period. 

  Sources: FTSE International Limited, S&P Dow Jones Indices LLC and MSCI Inc.

Sources: Bank of Canada, Bloomberg Finance L.P.

Source: Trust National Bank.

¹ Returns are not available for the FÉRIQUE 100% Equity Portfolio, as it has not yet been in existence for 12 months.

² Effective October 25, 2024, the International Equity Fund acquired assets from the FÉRIQUE Asian Equity Fund in a reorganization and the investment objectives of the Fund were changed. The performance prior to the effective date of the reorganization represents the performance of the FÉRIQUE European Equity Fund (now the FÉRIQUE International Equity Fund) with its prior investment objectives. The reorganization and the investment objectives changes could have materially affected performance of the Fund had they been in effect throughout the entire performance measurement period.

Canadian fixed income

In the first quarter, the Canadian bond market encountered mixed economic signals and rising geopolitical risks. 

At the outset, conditions were relatively favourable. The Bank of Canada held its key rate at 2.25%, contributing to a stable rate environment. Moderate inflation and signs of an economic slowdown supported the bond market’s performance, enabling the FTSE Canada Universe Bond Index to post gains in January and February. 

In March, however, the situation deteriorated. The sharp rise in energy prices, triggered by global supply disruptions related to the conflict in the Middle East, revived inflation expectations. This dynamic put upward pressure on bond yields, causing the prices of outstanding bonds to fall. 

Despite this decline at the end of the quarter, the overall performance of the Canadian bond market was slightly positive, with a gain of 0.23%. This return reflects opposing forces: an economic slowdown that supports demand for bonds versus inflationary pressures that limit their return potential. 

U.S. fixed income 

In the United States, the bond market was also affected by a constantly changing environment. 

In January and February, expectations for monetary policy were marked by uncertainty. Higher-than-expected inflation and doubts about the Federal Reserve’s independence damped down expectations of rate cuts. Investors remained cautious, adjusting their positions in response to economic news and political developments. 

The situation changed in March, when the conflict in the Middle East escalated. The oil price spike revived inflationary fears, prompting investors to adjust their expectations. The 10-year U.S. Treasury yield rose from 4.17% at the beginning of the quarter to 4.32% at the end. Some market participants expected the Federal Reserve to hold rates steady for some time, but others thought it would even raise them this year to contain inflationary pressures. 

This context illustrates bond markets’ central role as a barometer of economic expectations. Changes in yields reflect not only the growth outlook but also inflation expectations and geopolitical risks, which rose sharply during the quarter. 

Iran conflict and energy shock 

Escalation of the conflict involving Iran was a key factor in the quarter, with direct repercussions on the global economy. The closure of the Strait of Hormuz, a vital transit point for a significant portion of the world's oil and gas, caused energy prices to spike. 

Recent estimates suggest the shock could push U.S. inflation back toward 4.2% as energy prices rapidly drive costs up across the economy. Moreover, the rise in prices came when inflation was showing signs of moderating, which complicates central banks’ analytical frameworks. 

But the impact goes beyond inflation. The energy shock is also acting as a drag on global economic activity, increasing costs for businesses and weighing on consumption. The combination of higher inflation and weaker growth caused a marked deterioration of the macroeconomic environment during the quarter. 

Canadian equities 

The S&P/TSX Composite Index was up 3.9% in the first quarter, recording a positive performance despite increased volatility at the end of the period. 

The Canadian market’s advance was driven largely by the strength of commodities, particularly gold, which benefitted from its safe-haven status amid rising geopolitical tensions. Miners and gold mining companies made a significant contribution to the index’s return, especially in January and February. 

The financial sector also played a key role, supported by strong results from Canada’s major banks. In March, the market suffered a sharp decline, falling by 4.3%, its biggest monthly loss in nearly three years. The weakness was directly linked to the energy shock and concerns about a return of inflation. 

The economic situation also remained fragile. The economy contracted in the fourth quarter of 2025, with GDP down 0.6% on an annualized basis, partly because of trade uncertainties related to U.S. tariffs. Even so, a modest recovery occurred early in 2026, with growth of 0.1% in January and a preliminary estimate of 0.2% in February, before the energy shock related to the Iran conflict clouded the outlook.

U.S. equities 

The U.S. market ended the quarter in negative territory, with the S&P 500 Index down 2.6% in Canadian dollars and 4.3% in local currency. The difference was due to the U.S. dollar’s strength against the Canadian dollar, with the greenback having again become a safe haven at the start of the Iran conflict. 

The quarter was characterized by a high dispersion of returns and heightened volatility. In January, the markets rose modestly, supported by earnings growth expectations. That said, doubts about monetary policy and the Federal Reserve’s independence curbed investor enthusiasm. 

In February, concerns about artificial intelligence and its impact on certain business models weighed on the tech sector. Despite strong results, Nvidia received a mixed reaction from the market, adding to investor caution. 

In March, the conflict in the Middle East dominated the news. Rising energy prices fuelled inflationary fears and prompted investors to revise their monetary policy expectations. The technology sector remained under pressure, while the more defensive sectors held up better. 

Despite this difficult context, the markets rebounded in the last session of the month, supported by signs from the Trump administration that the conflict was easing, which helped limit losses for the quarter as a whole. 

International equities 

Developed markets outside North America posted a modest gain of 0.7% in Canadian dollars and 0.3% in local currencies. 

At the beginning of the quarter, the European markets benefitted from an improved economic climate and generally solid corporate earnings. Several economies, including Germany and Spain, showed signs of recovery, supporting investor confidence. 

However, the situation deteriorated in March. In Europe, rising energy prices caused inflation to exceed the European Central Bank’s target. The stock markets then anticipated monetary tightening, which weighed on valuations. 

In Japan, even though inflation eased in March, the weak yen began to cause import costs to rise, which, combined with the energy shock, increased inflationary pressures and reinforced expectations of a rate hike by the Bank of Japan as early as April. 

Emerging markets 

Emerging markets returned 1.7% in Canadian dollars and 2.2% in local currencies, despite a sharp correction in March. 

At the beginning of the quarter, these markets benefitted from an influx of capital and renewed interest from investors attracted by higher growth prospects and increased geographic diversification. The Asian markets, including South Korea and Taiwan, were supported by demand for technology and semiconductors. 

That being said, in March emerging markets were hit the hardest by the energy shock, falling 11.0% in Canadian dollars. Rising energy prices and tighter financial conditions led to selloffs as investors cut back their exposure to riskier assets. 

Despite the sharp decline, the overall performance for the quarter was positive, reflecting the increased volatility of these markets in an uncertain environment. 

Outlook

We can draw several conclusions from the first quarter of 2026. The markets showed some resilience at the beginning of the period, but proved to be highly sensitive to external shocks. 

The main sources of uncertainty persist: 

• the Middle East conflict and its impact on energy prices; 
• the trajectory of inflation; 
• monetary policy decisions by major central banks;  
• ongoing trade tensions and their impact on global growth. 

In this context, the bond markets will continue to reflect concerns about inflation and economic contraction. As for the equity markets, investor confidence will depend mainly on the geopolitical environment and companies’ ability to maintain earnings growth. 

The first quarter of the year was yet another reminder of how difficult it is to forecast market movements. Who would have predicted that a year that began with a widespread rise in the markets would devolve into an environment dominated by a major war and an energy shock? 

The temptation to respond quickly to events remains strong, but experience shows that impulsive decisions can lead to losses or foregone gains. Markets often move in unpredictable ways, alternating between periods of volatility and recovery. 

In this context, it’s vital to maintain a disciplined approach aligned with your long-term objectives. Diversification, risk management and patience are the keys to navigating an uncertain environment. More than ever, sticking to a structured strategy is the best way to cope with turbulent times and achieve your financial goals.