Financial Letter - Third quarter 2026

After a second quarter that saw the return of risk appetite, the financial markets had to contend with renewed tensions in the Middle East, another energy price spike, escalation of the Canada-U.S. trade conflict and a shift to more restrictive monetary policy by major central banks. The lack of progress in the U.S.-Iran negotiations pushed the oil price up by more than 30% in U.S. dollars during the quarter. 

The energy shock revived inflationary concerns. During the quarter, a number of central banks in the developed countries raised their key rates, including the U.S. Federal Reserve, the European Central Bank and the Bank of Japan. The Bank of Canada left its key rate unchanged but indicated it was prepared to tighten several times if inflation stayed too high. 

The bond markets were hit hardest by inflationary pressures, with the U.S. 10-year Treasury yield crossing the 5% threshold, a level not seen since 2007 at the start of the financial crisis. The current environment is different, however, and a new financial crisis doesn’t seem to be on the horizon. 

The equity markets, however, were remarkably resilient. A strong global economy and solid corporate earnings, supported once again by investments related to artificial intelligence, enabled most major indexes to end the quarter in positive territory. The S&P/TSX Composite Index was up 1.6% during the quarter, while in the United States the S&P 500 Index returned 2.4% in Canadian dollars. International developed markets rose 1.0%, while emerging markets fell 0.2%. As for fixed income, the FTSE Canada Universe Bond Index was down 3.0% 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

Canada’s bond market had a difficult quarter, ending all three months with a decline. Starting in July, the rising oil price and inflation concerns caused long-term yields to rise. 

On the economic front, the Canadian data improved significantly. The economy rebounded in the second quarter, posting annualized growth of 3.3%, the fastest pace since 2023, thereby avoiding a technical recession. Gross domestic product was unchanged in July but expanded by 0.2% in August according to Statistics Canada’s preliminary estimate. 

But inflation attracted the most attention. Higher oil prices linked to the conflict with Iran helped push Canada’s annual inflation rate to 3%, a level deemed high by Bank of Canada Governor Tiff Macklem. Moreover, damage to refineries in the Middle East and Russia caused a global diesel shortage. Diesel fuel is essential for freight transportation, agricultural operations and much of the manufacturing sector, which increases the risk that higher energy costs will drive prices up across the board. 

At its September 2 meeting, the Bank of Canada kept its key interest rate at 2.25%, but adopted a decidedly more hawkish tone, saying it was prepared to raise rates several times, if necessary. At the end of September, investors were expecting the key rate to go up by 25 basis points in December. Against this backdrop, the FTSE Canada Universe Bond Index fell 3% on the quarter. 

U.S. fixed income 

In the United States, the bond market came under significant pressure throughout the quarter. In July, the 10-year Treasury bond yield reached 4.84%, its highest level since January 2025.  

In September, the Federal Reserve raised its key interest rate for the first time since 2023, taking it to a range of 3.75% to 4.00% and signalling that more hikes could follow. The 10-year Treasury yield then crossed the 5% threshold with its biggest quarterly increase since 2009. At the end of the quarter, however, the inflation data provided some respite: the PCE Price Index, which the Federal Reserve favours as an inflation gauge, came in at 3.4% in August on a year-over-year basis, versus expectations of a 3.7% increase. 

Canadian equities 

The Canadian market ended the quarter higher, with the S&P/TSX Composite Index up 1.6%, for its ninth straight quarterly gain. 

Despite escalating trade tensions between Canada and the United States and a spike in bond yields at the end of the quarter, the market was buoyed by the energy, materials and information technology sectors. Higher oil prices helped energy companies, while the Canadian economy’s resilience and strong earnings from some companies sustained investor optimism.  

The trade conflict with the United States created considerable uncertainty, however. Negotiations broke down, the United States imposed approximatively 50% tariffs on $20 billion of Canadian exports and Canada then responded with tit-for-tat measures. Even though the Bank of Canada expects the overall economic impact to be limited, some sectors more directly exposed to trade between the two countries are vulnerable. 

U.S. equities 

The U.S. market returned 2.4% in Canadian currency and 2.3% in U.S. currency during the quarter. The greenback’s fluctuations had a limited impact on the quarter as a whole, with its weakness against the loonie in July and August offset by its strength in September. 

Solid corporate earnings, notably in the technology sector, continued to be the main driver of the U.S. market during the quarter. The earnings reported by major companies, such as Amazon, Microsoft and Nvidia, helped ease concerns about the profitability of massive investments in artificial intelligence infrastructure. Their results also helped semiconductor stocks recover from a correction earlier in the quarter. Even so, investors are still skeptical about AI-related companies’ spending and valuations, as well as the market’s heavy reliance on this theme.  

On the economic front, the U.S. economy proved resilient, with second-quarter GDP growth revised upward to 2.2% on the strength of consumer spending and AI-related investment. 

International equities 

The international developed markets posted modest gains during the quarter. The MSCI EAFE Index rose 1.0% in Canadian dollars and 0.7% in local currencies. 

In Europe, the markets initially benefited from solid corporate earnings before being held back by higher oil prices and rising bond yields. The energy shock also revived inflation in the euro zone, with the annual rate reaching 3.3% in Germany, 3.4% in France and 4.1% in Italy in September. In this context, the European Central Bank raised its key rates. 

In Japan, the market was supported by a more expansionary fiscal policy and a weak yen, which is favourable to exporters. That being said, the currency’s persistent weakness prompted a rare coordinated intervention in the foreign exchange market by Japan and the United States. In response to inflationary pressures and the weak yen, the Bank of Japan raised its key rate to 1.25%, the highest level in more than 30 years. 

Emerging markets 

After an exceptional second quarter, emerging markets were down 2.8% in local currencies in the third quarter, but only 0.2% in Canadian dollars, with currency fluctuations reducing the decline for Canadian investors. 

The artificial intelligence theme continued to be a key driver in the Asian markets, albeit with mixed results. South Korea’s KOSPI Index, which has significant exposure to chipmakers, had a difficult quarter after a spectacular advance the previous year.  

The rise in U.S. rates also weighed on emerging market equities, in addition to causing outflows of foreign capital, particularly from India. In China, the stimulus measures announced by the authorities failed to reassure investors, who continued to be concerned about weak household and business spending. Moreover, the summit between Presidents Trump and Xi ended without a major breakthrough. Even so, the outlook for corporate earnings in the region remained positive, and analysts revised their 2026 forecasts upward. 

Outlook

We can sum up the third quarter of 2026 as follows. The equity markets were remarkably resilient despite a backdrop that included a flare-up of the conflict in the Middle East, soaring energy prices, escalating trade tensions and a hawkish turn by central banks. Solid corporate earnings and a resilient global economy were the main contributing factors. In contrast, the bond markets saw yields spike amid ongoing energy-related inflationary pressures, tighter monetary policies and concerns about public finances. Government financing needs and increased bond supply also contributed to higher yields.  

In the coming months, the markets will continue to be driven by developments in the Middle East conflict, energy prices, inflation data and rate decisions by major central banks. Investors will also be paying close attention to ongoing trade wars, particularly the Canada-U.S. dispute, as well as corporate earnings growth.  

The U.S. midterm elections in November will also be a major factor. Losing control of one or both houses of Congress could limit the Trump administration’s ability to advance its legislative agenda, especially in terms of taxation, public spending and government funding. It would also strengthen the opposition’s oversight and investigative powers and, in the event of a loss of the Senate, could slow judicial and government appointments. It would not, however, automatically end U.S. tariff policy because the Trump administration would retain significant executive powers over trade. 

Despite a highly challenging environment, investors continued to focus on the outlook for corporate earnings growth while assessing risks related to inflation, interest rates and geopolitics. 

As always, short-term events are difficult to anticipate and can cause significant market fluctuations. Experience shows, however, that decisions made in the heat of the moment are rarely the most profitable. Maintaining a disciplined, diversified approach aligned with your long-term objectives is still the best way to navigate uncertainty and take advantage of opportunities that arise in the financial markets.