2026 Market Outlook
A Brief Review of 2025
2025 was a year defined by sharp contrasts. Equity markets experienced a meaningful drawdown in the spring, driven largely by renewed uncertainty around U.S. trade policy and the introduction of tariffs. These developments unsettled investors, raised concerns about global growth, and led to a short but sharp pullback in risk assets.
This period of weakness proved to be temporary as they made a sharp reversal once worst-case tarrif scenarios were priced out of the market. As the year progressed, markets shifted their focus back to underlying fundamentals — particularly corporate earnings, balance-sheet strength, and improving financial conditions. The result was a strong and increasingly broad-based recovery in the second half of the year, with leadership extending beyond a narrow group of stocks and into international markets and cyclical sectors.
This pattern served as a useful reminder that markets often react quickly to headlines in the short term, but are ultimately driven by earnings and economic fundamentals.
Several notable themes from 2025:
The U.S. dollar weakened materially.
Gold and precious metals were standout performers.
International equities (Europe, Japan, and Emerging Markets) outperformed U.S. stocks.
Canada was one of the top-performing equity markets globally.
Canada’s strong performance surprised many given the country’s economic challenges. This serves as an important reminder that regional stock markets do not perfectly mirror their local economies.
Nearly half of the TSX’s gains came from the Materials sector, as precious metal miners benefited from a sharp rise in gold prices. Canadian banks were the other major contributor, driven by improving earnings, lower-than-expected credit losses, and valuation recovery after years of underperformance.
Gold and international equity markets were the standout performer in 2025, along with other precious metals, and this trend has continued into 2026. Strength in gold was driven by US$ weakness, material central bank buying, and lower real interest rates.
International markets benefited from a rotation out of US assets, and the partial closing of the large valuation spread US had enjoyed relative to its global peers.
Fixed income also delivered respectable returns after several lack-luster years, as interest rates declined overall through the year.
The Market Setup Entering 2026
Markets entered 2026 with positive momentum, building on the strength seen late last year. While concerns around elevated valuations—particularly in U.S. equities—and potential excesses in AI-related investments persist, most market strategists expect positive returns this year (spoiler alert - they expect positive returns every year).
Importantly though, these expectations are grounded in solid expected underlying earnings growth of high-single-digit to low-double-digits, rather than speculative valuation expansion. Supporting this outlook is improving global growth relative to 2025. IMF estimates that global real GDP growth will be a decent 3% in 2026.
Regional dispersion is expected though, with emerging market economies GDP growth outpacing developed:
U.S. - 2.0%
Canada - 1.5%
Euro Area - 1.2%
China - 4.25%
It’s important to note that these growth figures refer to real growth, not nominal growth — a distinction that is often missed in news headlines. Nominal growth equals real growth plus inflation.
For example, if inflation is expected to be 2.5% in 2026, a real GDP growth rate of 2.0% for the U.S. translates into roughly 4.5% nominal GDP growth.
This distinction came up at Davos last week, when the President referenced 5% growth — a figure that reflects nominal growth, whereas the standard convention is to cite real GDP growth. Christine Lagarde, President of the European Central Bank, later emphasized this difference in her remarks.
Understanding Equity Market Returns
I think its helpful to have a high level understanding of what factors actually drive equity market returns. There are three components:
Earnings growth
Changes in valuation (price-to-earnings multiples)
Dividend yield
For example, the S&P 500 currently trades at roughly 22x forward earnings. If corporate earnings grow at their current expected rate of approximately 13%, and valuations remain unchanged, investors could reasonably expect a total return of around 14%, including dividends. That would be a solid outcome by any standard.
Under a more cautious scenario — where earnings growth slows to, say, 8%, and valuations contract to 18x forward earnings due to lower growth expectations— the resulting market return would be around negative 8–9%. While clearly not an ideal outcome, this is not my base case, and it still falls well short of the “market crash” scenarios that tend to dominate headlines. Getting to those outcomes would require a much more severe and sustained deterioration in fundamentals accomponied by a material decline in valuation.
Understanding this framework helps keep short-term market noise in proper perspective. While U.S. equity valuations are elevated by historical standards, the factors that ultimately drive valuations — profit margins, earnings growth, and returns on capital — are also stronger than they have ever been, reflecting the current composition of the index.
Finally, it is difficult to envision a prolonged and material contraction in growth expectations in the near term, particularly as both fiscal policy and monetary policy appear poised to become more accommodative this year, and could become even more so if economic conditions were to weaken.
Policy Tailwinds Remain Supportive
Both monetary (interest rates) and fiscal (government spending) policy are likely to remain supportive in 2026. Central banks have room to cut interest rates should economic conditions weaken and governments globally continue to run expansionary fiscal policies. Together, these forces increase liquidity in the financial system and tend to support risk assets over time.
Volatility Is Normal
Market pullbacks are not just normal—they’re expected. It’s important not to panic when markets correct. In fact, since 1928 a 5% market decline occured in nearly 95% of years, and 10% correction happened in almost 65% of years. Despite these fluctuations, the majority of these years still ended with positive returns.
Understanding and expecting market volatility helps investors stay disciplined, avoid emotional decisions, and, in some cases, be opportunnistic.
Asset Class Outlook for 2026
U.S. Equities
2025 proxy performance:
iShares Core S&P 500 Index ETF (XUS.TO): +12.19% total return
U.S. equities continue to be supported by the strongest earnings growth profile in the developed world. While valuations are elevated relative to history, this largely reflects the composition of the index, which is heavily weighted toward high-quality, high-growth businesses with strong balance sheets and durable competitive advantages. Looking ahead, returns are likely to be driven more by earnings growth than by further valuation expansion. Comparisons to the late-1990s dot-com era are overstated, as today’s largest companies are highly profitable and generate substantial free cash flow. That said, elevated valuations may lead to more short-term volatility, particularly if growth expectations are revised lower at any point during the year. Bottom line: Constructive outlook, with an expectation of positive returns driven primarily by earnings growth rather than multiple expansion.
International Developed Equities (Europe & Japan)
2025 proxy performance:
Vanguard FTSE Developed Europe All Cap ETF (VE.TO): +29.56%
BMO Japan Index ETF (ZJPN.TO): +20.34%
International developed markets delivered strong returns in 2025, closing part of the long-standing valuation gap with U.S. equities. Even after last year’s rally, valuations remain more attractive than in the U.S., and earnings growth is improving. Supportive fiscal policy, more accommodative monetary policy, and ongoing improvements in corporate governance — particularly in Japan — are constructive tailwinds. These markets may also continue to benefit from global capital flows seeking diversification away from the U.S., especially if the U.S. dollar remains weak. Bottom line: Attractive valuations and improving fundamentals make developed international equities an important diversifier within portfolios.
Emerging Market Equities
2025 proxy performance:
iShares Core MSCI Emerging Markets IMI ETF (XEC.TO): +25.78%
The outlook for emerging markets continues to be attractice. A weaker U.S. dollar is a key positive, as it eases financial conditions for many emerging economies and supports capital inflows. In addition, structural improvements — including better corporate governance, more disciplined capital allocation, and growing domestic consumer bases — are strengthening the long-term investment case. South Korea was a standout performer in 2025, highlighting how selective exposure can be rewarded. Bottom line: Compelling diversification benefits and long-term return potential when sized appropriately within portfolios.
Canadian Equities
2025 proxy performance:
iShares Core S&P/TSX Capped Composite ETF (XIC.TO): +31.68%
Canadian equities had a standout year in 2025, driven disproportionately by the Materials sector — particularly precious-metal producers, as well as strong performance from financials and Shopify. It’s important to note that equity market performance does not always mirror the broader economy. Much of last year’s return was concentrated in a small number of sectors and stocks, meaning outcomes varied widely depending on portfolio composition. Looking ahead, bank valuations are near the upper end of historical ranges, and earnings expectations appear optimistic. A repeat of 2025’s performance is unlikely without Financials helping, and several sectors remain exposed to consumer weakness and global trade uncertainty.
Bottom line: Neutral outlook. Canada remains an important component of portfolios, but expected returns are more moderate following a very strong year.
Fixed Income
2025 proxy performance:
iShares Core Canadian Universe Bond ETF (XBB.TO): +2.59%
Fixed income continues to play a role in convervative and balanced portfolios, offering income, diversification, and capital stability. That said, yields are less compelling than in prior years, and longer-term interest rates could drift higher than lower in 2026. As a result, return expectations for traditional bonds are modest, and careful positioning is required. In many cases, non-traditional income strategies may offer more attractive risk-adjusted opportunities than broad bond exposure.
Bottom line: Important for diversification, but return expectations are limited. Focused on high-yield strategies and shorter-term exposure.
Gold and Precious Metals
2025 proxy performance:
iShares Gold ETF (CGL.TO): +58.39%
Gold delivered exceptional returns in 2025, supported by a weaker U.S. dollar, declining real interest rates, and heightened geopolitical uncertainty. While a repeat of last year’s gains is unlikely, the asset class continues to play a valuable role as a portfolio diversifier.Gold tends to perform well during periods of financial stress and policy uncertainty, making it a useful hedge against both inflationary and deflationary risks. Bottom line: Returns are likely more modest in 2026, but gold remains a core diversifying asset in client portfolios.
Alternatives / Non-traditional Asset Classes
Real Estate: Fundamentals remain solid in pockets like grocery‑anchored retail, though higher interest rates and sticky cap rates limit near‑term upside. Multi‑family outlook has softened due to slower population growth and rising supply. Office is improving but still weak, while industrial should remain stable in 2026 as supply growth slows and demand stabilizes. 2025 private real estate returns ranged from +5% to +12%. I continue to prefer real estate as an income alternative to bonds.
Private Equity: Deal activity looks to be picking up, supporting valuations. Secondary funds holding diversified, mature portfolios continue to be preferred. Seasoned managers are expected to deliver low double-digit returns, with meaningful dispersion between top and bottom quartile funds. While returns can lag public markets in strong years, the stability of PE helps smooth portfolio performance. I remain positive on this asset class.
Hedge Funds: Market-neutral and long/short equity strategies offer equity-like returns with lower volatility and downside protection. Heading into 2026, these strategies are gaining attention given market overvaluation concerns and their risk-mitigation characteristics. I am incrementally more positive on this hedge funds in 2026.
Bottom line: Attractive opportunities exist across alternative assets, but the backdrop underscores the importance of careful manager selection, disciplined due diligence, and thoughtful structure. Alternatives can enhance diversification, reduce drawdowns, and improve risk‑adjusted returns — but the value you capture depends heavily on the team and strategy.
Portfolio Positioning and Philosophy
Diversification and risk management remain central to my investment approach. Portfolios are built to participate meaningfully in market upside while managing downside risk and delivering strong, risk-adjusted returns over full market cycles.
I do not take a “set-it-and-forget-it” approach. I remain active and responsive to changing market conditions, making tactical adjustments when warranted, while maintaining a disciplined long-term framework.
At all times, the focus is on maximizing return per unit of risk — not chasing short-term performance, but consistently compounding capital over time.
Final Thoughts
While markets will inevitably experience periods of weakness this year, overall uncertainty appears lower than it did a year ago. Supportive policy conditions, resilient earnings, and disciplined portfolio construction provide a solid foundation moving forward.
While Jan 1st marks the start of a new year, market views dont just reset annually over the holiday season. Relative allocations are assessed on a continual basis and my views are sure to evolve through the year.
If there is one certainty in markets, it is uncertainty. Periods of strong performance often create the temptation to expect something bad to happen next, or to try to step aside at exactly the “right” moment. History shows that this instinct is rarely rewarded. Long-term success is driven far more by time in the market than by attempts to time it, and large, wholesale shifts in and out of asset classes tend to do more harm than good over time.
The focus remains on building and maintaining portfolios designed to meet client’s long-term goals, manage risk thoughtfully, and remain disciplined through inevitable periods of volatility. This approach has proven far more effective than reacting to short-term noise — and it remains the foundation of how portfolios are managed at Rivers Wealth.
