Financial Panorama

Investors drawn to global stock markets outside the United States

This trend could well continue in 2026, and it’s worth noting that during the period from 2000 to 2010, the Canadian, emerging economies, and EAFE stock markets all outperformed the S&P 500.

In recent months, there has been a strong trend toward limiting exposure to U.S. large-cap technology stocks and diversifying investments.

This does not mean that investors have sold off their U.S. stocks en masse, but rather that they are looking to invest differently and diversify their portfolios. The popularity of the theme of massive infrastructure construction for the deployment of artificial intelligence (known as “AI server farms”) has now given way to questions about the profitability of these investments. In other words, investors will want to assess the profits that will be generated by these considerable expenditures. For example: how many users will there be for Copilot, Microsoft’s virtual assistant, and how much will they be willing to pay monthly for this service?

The global economy continues to grow, and government measures or initiatives such as increased defence spending in Europe and fiscal stimulus in Japan following the recent elections are positive factors for stocks considered cyclical.

What do we mean when we talk about “cyclical” stocks? These are usually stocks in the financial, industrial, materials, and energy sectors. They are called “cyclical” because their profitability is linked to the economic cycle, as opposed to non-cyclical stocks such as those in the healthcare or consumer staples sectors, for example.

These sectors carry more weight in countries outside the United States. Non-cyclicals represent nearly 80% of the S&P/TSX index, 54% of EAFE markets, and 41% of emerging markets, but only 27% of the S&P 500.

In addition, a weaker U.S. dollar has historically been positive for emerging markets.

The small-cap segment is also making a comeback. In the U.S., deregulation efforts in many industries and a lower impact of tariffs are positive factors. Elsewhere, such as in Europe and Japan, higher government spending should boost small caps, which are strongly impacted by more local situations and events.

Higher returns outside the U.S. were the norm in the early 2000s, and we could see a repeat of this.

Canadian and U.S. policy rates: next meetings on March 18, 2026

On Wednesday, January 28, the Bank of Canada (BoC) decided to leave its target rate unchanged at 2.25%. This decision was anticipated by the market, as the release of employment data on Friday, January 9, showed job creation rather than job losses. Markets are anticipating a possible rate cut in December 2026.

South of the border, a new chair has been appointed to the U.S. Federal Reserve (Fed). Kevin Warsh, who previously served as a Fed governor from 2006 to 2011, will take office in May 2026, succeeding current chair Jerome Powell. His appointment was well received by the markets. He is expected to promote the idea that productivity gains associated with the deployment of artificial intelligence should enable economic growth without inflation, and therefore a reduction in key interest rates. It should be noted that the Fed’s decisions are taken by a majority of the 12 persons who make up the FOMC (Federal Open Market Committee), which meets eight times a year to discuss monetary policy and decide on key interest rates. As for possible rate cuts in 2026, the markets are anticipating two or three.

With regard to key interest rates, the central banks of Europe, Japan, and Canada are on hold or even considering increases, especially in Japan and Australia, which has already raised rates. If such divergences in global monetary policy continue to widen, they are likely to weaken the U.S. dollar.

One of the surprises of 2025 was in fact the weakness of the greenback, especially against the euro. The pressure exerted by the U.S. president on the Fed to lower its key interest rates, combined with the imposition of tariffs, meant that inflation remained higher than expected, which reduced the value of the U.S. dollar and its purchasing power, drove up the price of gold, and made exports less expensive for the U.S. administration.

Employment rebound in Canada

The loss of 24,800 jobs in January fell well short of expectations, which called for the addition of 5,000 jobs. It was mainly full-time jobs (+45,000) that boosted the labour market, while the sharp decline in workers in January was due to the loss of part-time jobs (-70,000). Since the labour force declined, the unemployment rate fell to 6.5%, while wage growth remained strong at 3.3%.

Tariffs: still awaiting a Supreme Court decision

During the November 5 hearing on the legality of tariffs imposed by the U.S. administration on many countries, the justices of the U.S. Supreme Court appeared skeptical of the government’s arguments. A ruling will be issued by next summer, but the markets are expecting a decision much sooner.

It should be noted, however, that the market reaction could be weaker than anticipated a few months ago. Markets react to what differs from the consensus. Currently, investors expect the decision to prevent the use of tariffs in part or in full.

However, there is one unknown factor that could still cause market volatility: will the Court order the reimbursement of tariffs already collected?

A decision against the U.S. administration would not necessarily mean the abolition of all tariffs, but it would require a different legal process for imposing them, which would limit the power of government authorities to impose tariffs at will.