Markets Commentary: Third Quarter 2026

The dominant story to end the quarter was a Government of Canada Bond and U.S. Treasury selloff, as yields increased across the curve. Sentiment over rising government deficits, energy prices, economic growth and evolving central bank policy framework repeated itself across other global government bonds.

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

The Bank of Canada has remained on hold through the first three quarters of 2026. Future policy decisions are expected to be influenced not only by incoming economic data but also by developments in the Fed’s federal funds rate.

The headline inflation rate in Canada rose to 3.1 percent in September of 2026, up from 3.0 percent in August. The increase was largely driven by higher gasoline prices. The unemployment rate in Canada rose to 6.5 percent in September, up slightly from 6.4 percent in August. The increase occurred alongside a reported loss of 68,000 jobs during the month.

At the September meeting of the Fed’s Federal Open Market Committee (FOMC) meeting, the board voted unanimously to end a two-year cutting cycle by raising the Federal Funds Rate by 25 bps to a range of 3.75–4.00 percent. In rendering its decision, the board prioritized price stability and the return of inflation to a 2 percent target, given that the U.S. August unemployment rate of 4.1 percent is viewed as running in line with full employment. This was a reputational move. In a press conference following the meeting, Fed Chair Kevin Warsh stated, “We removed a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives. Today’s action starts to show we’re serious.” At its October meetings, the FOMC voted to make no change to the benchmark interest rate steady.

As for forward rate guidance, the Fed’s “dot plot” (projection for the funds rate) at the end of 2026 shows a consensus median estimate of one more 25 bps increase to 4.0 percent. This perspective includes 16 committee participants expecting at least one more rate hike by year-end, while four expect two more. There is more divergence moving forward into 2027 and later, given that the current bout of inflation is primarily supply-driven shocks from both the Iran war pushing up oil prices and AI’s demand for memory chips.

The Fed’s preferred inflation measure of core Personal Consumption Expenditures (PCE), which excludes food and energy, increased at a lower-than-expected monthly rate of +0.2 percent in August, with an annualized rate of 3.0 percent. The August headline consumer price index (CPI) rose 0.4 percent and an annualized rate of 3.4 percent, while core CPI (ex-food and energy) was up 0.3 percent for the month and 3.0 percent for the year. The August numbers were lower than expected, but core inflation remains above target. The Producer Price Index (PPI) showed wholesale prices accelerating in August with a 0.4 percent increase during the month and 5.4 percent annualized — driven mostly by energy and goods costs. The September Bureau of Labor Statistics jobs report was weaker than anticipated, with payrolls increasing by 29,000 as the unemployment rate nudged higher to 4.2 percent and prior months (July and August) revised downward by 60,000. The Conference Board Consumer Confidence Index decreased sharply in September to 81.9.

Canadian equity market

The Canadian Equity Market advanced 1.62 percent in the third quarter of 2026, as measured by the S&P/TSX Composite Index. Year-over-year returns for the index remain strong at 20.02 percent amid continued issues of trade and geopolitics.

The Information Technology sector was the top performing sector for the quarter, producing a return of 17.94 percent in Q3. This was followed by the Materials sector, returning 12.85 percent, and the Energy sector, returning 3.27 percent for the quarter. The Communication Services sector was the largest detractor in Q3, producing a negative return of -9.26 percent.

U.S. equity markets

The S&P 500^® ended the quarter on a negative note. September produced a return of -0.3 percent. Yet the S&P 500^® remains near striking distance of its recent August all-time high close. Sector performance varied widely, with only IT (+4.5 percent) and Communication Services (+4.3 percent) in positive territory in September; all other sectors were negative as Financials (-7.2 percent) and Materials (-6.7 percent) trailed. Small- and mid-cap stocks were also negative and trailed large-cap stocks on a relative basis. Growth outperformed value comparatively, while the S&P 500^® equal‑weighted index (-4.8 percent) trailed the cap‑weighted index.

International equity markets

International equity markets were also negative to end the quarter. Emerging markets (EM) posted returns ahead of developed markets (EAFE) in September. EM performance on a relative basis by region had Eastern Europe (+6.3 percent) ahead of Asia (+3.3 percent) and Latin America (-0.7 percent). EAFE performance on a relative basis by region had Pacific (+3.1 percent) leading Europe (+1.4 percent). Ireland (+9.1 percent) led major developed market countries, while South Africa (+11.5 percent) led EM countries.

Fixed income markets

Canadian bond market returns were negative for the quarter. The FTSE Canada Corporate Bond Index produced a negative return of -2.14 percent in Q3. The FTSE Canada Government Bond Index decreased at -3.23 percent and the FTSE Canada Universe Index produced a negative return of -2.96 percent in Q3.

U.S. fixed income markets were negative in the third quarter, with the Bloomberg U.S. Aggregate Index decreasing -3.51 percent in U.S. dollars.

The U.S. Treasury yield curve shifted higher as yields rose across the spectrum, with a more prominent bump in the short and middle portions amid concerns about elevated inflation and fiscal outlook. All major aggregate index components were negative, as the 10-year Treasury yield surged in September from 4.80 percent to 5.29 percent to reach its highest level since 2007. Treasuries outperformed on a relative basis as spreads widened across Corporate Investment Grade (IG), High Yield (HY) and Mortgage-Backed Securities (MBS). Issuance of both IG and HY Corporate supply remained robust, but lower-quality issuers were more sensitive to rising market volatility.

Looking ahead

The focus will be on whether any de-escalation of the U.S.-Iran conflict begins to reduce pressure on energy prices and surging global bond yields. In the U.S., attention will be on the congressional midterm elections, and anticipation as to whether a leadership change will impact corporate taxes, regulations and trade policy. Investors will be assessing the Bank of Canada and the Federal’s policy trajectory, and whether sticky inflation levels remaining above target will continue a hawkish approach.

Markets are anticipated to remain on alert, as the AI trade continues to drive global equity performance, and GDP growth is projected to remain steady, but stresses from higher oil prices and interest rates remain headwinds to robust earnings.