Markets Commentary: Second Quarter 2026

Mid-month featured the announcement of a U.S.-Iran deal to reopen the Strait of Hormuz, triggering a broad equity relief rally. Energy prices declined, with WTI crude oil falling 25 percent during the month to close below $70 per barrel at the end of Q2, after reaching $115 per barrel earlier in the year.

After presenting a brief overview of the global economy, this commentary covers Canadian, U.S. and international equity markets, as well as fixed income performance. We conclude with a look ahead.

Overview of the global economy

In Q2, The Bank of Canada maintained the Overnight Lending Rate at 2.25 percent throughout the quarter. The Bank of Canada has remained on pause through with first half of 2026, with future direction dependent on geopolitical, trade, economic and inflation outcomes.

The headline inflation rate in Canada fell to 2.8 percent in June of 2026 from the over-two-year high of 3.2 percent in the previous month, slightly under market expectations of 2.9 percent. The unemployment rate in Canada eased to 6.5 percent in June of 2026 from 6.6 percent in the previous month, below market expectations that it would remain unchanged and tying for the lowest since July of 2024.

Federal Reserve Chair Kevin Warsh held his first FOMC press conference after the committee held interest rates at 3.50–3.75 percent in June. The Consumer Price Index (CPI) rose at an annualized rate of 4.2 percent in May, driven by energy prices. The Fed’s preferred measure of core Personal Consumption Expenditures (PCE), which excludes food and energy, rose at an annualized rate of 3.4 percent in May. The May BLS jobs report was stronger than anticipated, with payrolls increasing by 172,000, while prior months were revised higher by a combined 93,000 jobs and the unemployment rate held at 4.3 percent.

The Conference Board Consumer Confidence Index edged higher in June to 91.2. The ISM U.S. Manufacturing Purchasing Managers’ Index (PMI) decreased in June to 53.3, marking the sixth straight month of expansion despite mixed results in the underlying components, which showed the overall economy growing at a slower pace.

Canadian equity markets

The Canadian Equity Market advanced 6.96 percent in the second quarter of 2026, as measured by the S&P/TSX Composite Index. Year-over-year returns for the index remain very strong at 32.87 percent amid issues of trade and geopolitics.

Driven by outsized returns from bank stocks, the Financials sector was the top performing sector for the quarter, producing a return of 25.57 percent in Q2. This was followed by the Industrials sector, returning 10.57 percent, and the Consumer Discretionary sector, returning 8.91 percent for the quarter. The Materials sector was the largest detractor in Q2, producing a negative return of -11.53 percent.

U.S. equity markets

Markets ended the quarter with volatility. In June the S&P 500 declined 1.0 percent to close at 7,499 but posted a strong second-quarter return of 15.2 percent and was up 10.2 percent for the first half of the calendar year. Sector performance varied widely in June, with Industrials (+7.3 percent) and Healthcare (+6.6 percent) leading, while several sectors were negative, with Communication Services (-7.8 percent) and Energy (-5.1 percent) trailing. Small- and mid-cap stocks were positive and led large-cap stocks on a relative basis. Value outperformed growth on a relative basis, while the S&P 500 equal‑weighted index outperformed the cap‑weighted index.

International equity markets

International equity markets were also volatile to end the quarter, with developed markets (EAFE) barely positive in June at +0.1 percent and ahead of emerging markets (EM), which were in negative territory at -1.4 percent. EAFE performance on a relative basis by region had Europe (+1.0 percent) ahead of Pacific (-1.1 percent). EM performance on a relative basis by region had Asia (-1.1 percent) ahead of Eastern Europe (-1.5 percent) and Latin America (-2.4 percent). The Netherlands (+11.8 percent) led major developed market countries, while Colombia (+12.4 percent) led emerging market countries in the final month of the second quarter.

Fixed income markets

Canadian bond market returns were positive for the quarter. The FTSE Canada Corporate Bond Index produced a positive return of 2.08 percent in Q2. The FTSE Canada Government Bond Index increased at 1.99 percent and the FTSE Canada Universe Index produced a positive return of 2.01 percent in Q2.

U.S. fixed income markets were relatively flat in the second quarter, with the Bloomberg U.S. Aggregate Index increasing 0.67 percent in U.S. dollars.

The U.S. Treasury yield curve flattened further as yields rose across the front and middle portions amid concerns about elevated inflation and new Fed leadership, while the long end declined amid concerns about growth and the fiscal outlook. Investment-grade (IG) corporate and high-yield spreads remained stable amid resilient fundamentals and increased issuance, while mortgage-backed securities benefited from lower prepayment risks as rates remained elevated, enhancing cash flow stability.

Looking ahead

Markets are fluctuating between familiar geopolitical headlines and the impact of AI. The reduction in energy prices is helpful from a near-term inflation perspective, but energy should remain a critical focus as the midterm election cycle ramps up. Investors should remain vigilant about concentrated exposure to mega-cap technology companies as the AI build-out continues to meaningfully affect market valuations and performance. Markets will continue to closely watch new Fed Chair Warsh’s public comments for insight into the degree of forward guidance he may provide about upcoming rate decisions. Recently, he acknowledged that while inflation remains too elevated, risks have abated somewhat, but he also resisted providing clues about possible future monetary policy moves.