Financial Letter - Second quarter 2026

The second quarter of 2026 saw a significant recovery in risk appetite despite a still-complex economic and geopolitical environment. After the first quarter was disrupted by the escalating conflict in the Middle East and the resulting energy shock, the financial markets gradually regained their momentum. Progress toward a U.S.-Iran ceasefire and the gradual reopening of the Strait of Hormuz eased concerns about global oil supplies and reduced the upward pressure on energy prices.

Apart from geopolitical developments, the main driver for markets during the quarter was strong corporate earnings, especially in the technology sector. The solid earnings and growth prospects of companies linked to artificial intelligence fuelled investor confidence, supporting not only large U.S. tech companies but also the global semiconductor chain, especially in Asia. Despite growing concerns about the sector’s spending and valuations, its earnings growth outlook remained positive during the quarter. 

Central banks maintained a cautious approach. The Bank of Canada and the U.S. Federal Reserve both kept their key rates unchanged, preferring to wait for more evidence of a sustained slowing of inflation before easing their monetary policy. High energy prices added to inflationary pressures at the start of the quarter, but their gradual decline in June improved the outlook for the bond market. 

In this environment, equity markets performed strongly. The S&P/TSX Composite Index rose 6.4% on the quarter. In the United States, the S&P 500 Index returned 17.1% in Canadian dollars on solid corporate earnings and the greenback’s strength against the loonie. International developed markets were up 12.9%, while emerging markets led the way with a remarkable gain of 26.2%, supported mainly by Asian markets and global enthusiasm over artificial intelligence. As for fixed income, the FTSE Canada Universe Bond Index returned 2.01% on the quarter.  

  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 ETF Moderate+ Portfolio, ETF Balanced Portfolio, ETF Growth+ Portfolio and ETF 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

The Canadian bond market faced occasionally contradictory forces. At the start of the quarter, investors were concerned about the consequences of the energy shock that occurred late in the first quarter. High oil prices fuelled inflationary fears, prompting the Bank of Canada to keep its key rate unchanged despite some signs of an economic slowdown.  

At the same time, Canadian economic data presented a mixed picture. After several months of moderate growth, the data released in May showed that the economy had contracted slightly on an annualized basis in the first quarter, raising the possibility of a technical recession. Trade uncertainties related to U.S. tariffs also continued to deter investment by some Canadian businesses. 

Despite this backdrop, bonds eventually benefited from a change in investor perception. The gradual easing of geopolitical tensions and, above all, the sharp decline in oil prices in June helped reduce inflation expectations. These developments caused bond yields to fall and the value of outstanding bonds to rise. As a result, the FTSE Canada Universe Bond Index rose 2.01% during the quarter.

U.S. fixed income 

The U.S. bond market was affected mainly by the inflation outlook and expectations for the Federal Reserve’s monetary policy. In April and May, the resilient economy and sticky inflation prompted investors to postpone their expectations of rate cuts. However, the situation improved in June when tensions in the Middle East abated and lower oil prices calmed inflationary concerns. The U.S. 10-year bond yield ended the quarter at about 4.4%, down from a peak of about 4.7% in May. Even so, the markets still expect the Federal Reserve to maintain a cautious approach before starting an easing cycle.

Canadian equities 

The Canadian market had a strong second quarter, with the S&P/TSX Composite Index up 6.4%. Even though the geopolitical context was still marked by tensions in the Middle East and uncertainties surrounding U.S. trade policies, investors gradually regained confidence. The improved market sentiment resulted in two especially strong months, April and May, followed by a more subdued June.  

Corporate earnings were a major supporting factor throughout the quarter. A number of Canadian companies beat earnings expectations. Financials and technology were the market’s main drivers; banks benefited from a more stable interest rate environment, while companies associated with digital infrastructure and artificial intelligence continued to make strong gains. 

The energy sector presented a different picture. After benefiting from surging oil prices in the first quarter, energy companies were penalized when crude oil fell sharply in June. Progress toward a U.S.-Iran ceasefire and the gradual reopening of the Strait of Hormuz improved the global supply outlook, causing energy prices to decline significantly. Gold mining companies also came under pressure during the quarter as the falling gold price reduced their appeal. 

On the economic front, the Canadian data continued to send mixed signals. After economic activity contracted slightly in the first quarter, gross domestic product grew 0.5% in April, exceeding expectations and reassuring investors about the economy’s resilience. The effects of trade tensions with the United States persisted but appeared to be concentrated in sectors more directly affected by the tariff measures.

Generally speaking, the Canadian market demonstrated considerable ability to adapt to an uncertain environment. Solid corporate earnings and a gradual recovery in investor confidence enabled the S&P/TSX to end the quarter in positive territory. 

U.S. equities 

The U.S. market dominated the developed markets in the second quarter, with the S&P 500 Index up 15.2% in U.S. dollars and 17.1% in Canadian dollars. Returns to Canadian investors were boosted by the greenback’s strength against the loonie. 

Once again, the technology sector was the market’s main driver. Companies associated with artificial intelligence and digital infrastructure continued to report solid results, boosting investor confidence in their long-term growth outlook. Nvidia, Microsoft and Dell Technologies stood out amid strong demand for data centres, semiconductors and computing capabilities needed to develop artificial intelligence. SpaceX’s highly anticipated initial public offering also spurred investor enthusiasm for growth companies and leading-edge technologies.  

Even so, this dynamic came with increased volatility. In June, a number of large technology companies saw declines as investors continued to scrutinize their high valuations and the massive investments required to sustain their growth. Despite the profit taking, their earnings growth outlook remained favourable and continued to provide substantial support to the market. 

Once again, the macroeconomic environment was mixed. Data released during the quarter showed that the economy remained resilient despite signs of sticky inflation. Against this backdrop, the Federal Reserve kept its key rate unchanged, taking a cautious approach to inflation developments and the economic outlook. 

The geopolitical context also affected the markets’ behaviour. Progress toward de-escalation in the Middle East allayed concerns about global energy supplies and helped improve market sentiment near the end of the quarter.  

International equities 

Developed markets outside North America also had a favourable quarter with the MSCI EAFE Index rising 12.9% in Canadian dollars.  

In Europe, the easing of geopolitical tensions in the Middle East and lower oil prices helped calm concerns about inflation and boost investor confidence. Financials and industrials were among the main drivers of performance, with European banks continuing to deliver solid earnings and positive guidance. Investors also showed increased interest in non-U.S. developed markets with attractive valuations. 

In Japan, equities also posted solid gains, driven by a resilient economy and the bright outlook for exporters. The Bank of Japan raised its key interest rate to 1.0%, in line with market expectations. Persistent weakness in the yen continued to enhance the competitiveness of Japanese exporters, while companies associated with computer hardware and semiconductors benefited from robust global investment in AI infrastructure. 

Emerging markets 

Emerging markets had the best performance in the second quarter, advancing 26.2% in Canadian dollars. This outstanding return was due mainly to the Asian markets, which continued to benefit from their central role in the global AI supply chain.  

With strong global demand for semiconductors and electronic components, South Korea and Taiwan stood out. Major investments by big tech companies to develop their AI capabilities have directly supported a number of Asian manufacturers and attracted large capital flows to these markets. 

The improved geopolitical backdrop, marked by de-escalating tensions in the Middle East and lower energy prices, also supported emerging markets. Despite a still-uncertain global environment, the growth outlook for emerging markets remained favourable.

Outlook

There are a number of takeaways from the second quarter. The financial markets showed remarkable resilience despite geopolitical uncertainty, trade tensions and inflationary concerns. Robust corporate earnings and sustained investment in artificial intelligence were the main drivers, while a gradual improvement in the energy environment also supported investor confidence. 

In the coming months, investors will continue to closely watch geopolitical developments in the Middle East, the outlook for inflation and decisions by major central banks. They will also be scrutinizing corporate earnings and ongoing investment in technology infrastructure. 

Despite the still-complex environment, investors have focused on the earnings outlook, particularly in AI-related sectors, while gradually reassessing geopolitical risks. 

As always, short-term events are difficult to anticipate and can cause significant market fluctuations. Experience reminds us that decisions made under the influence of emotion are rarely the most profitable ones. A disciplined, diversified approach aligned with long-term objectives is the best way to navigate uncertainty and take advantage of opportunities presented by the financial markets.