Positioning portfolios amid the market rally

What you need to know

• Equity markets extended their rally in May, driven by strong corporate earnings—particularly in the U.S. technology sector—and improving sentiment tied to expectations of a diplomatic resolution to the Iran conflict, which also sent oil prices lower.
• Fixed income also delivered positive returns, led by international high-yield bonds and Canadian investment-grade bonds, as easing geopolitical tensions supported both lower yields and tighter credit spreads.
• We believe the outlook for global equity markets may remain constructive, supported by resilient economic activity and solid earnings growth.

Portfolio tip

Equities have rallied sharply over the past two months, raising the question of whether markets have gone too far, too fast. Rather than attempting to time market peaks, we recommend investors focus on diversification and maintain a disciplined, goal-oriented investment strategy. 

Where have we been?

The equity market rally continued in May, supported by strong earnings growth and rising expectations for a diplomatic resolution to the conflict in Iran. Global equities extended April’s momentum, building on a sharp rebound from the March lows. Easing geopolitical tensions supported investor sentiment and pushed WTI crude oil prices down from over $100 per barrel early in the month to below $90 by month-end.

Canadian large-cap stocks rose 2.5% in May, supported by continued strength in the materials sector, which gained 6.2% for the month and is up more than 75% over the past year. Canadian small- and mid-cap equities also posted solid gains, rising 4% in May. U.S. and international markets delivered strong returns as well, underpinned by robust profit growth in global technology companies.

Strong momentum within the technology sector continued. Within U.S. equities, the technology sector remained the leader in May, rising 16% and more than 40% since the March 30 low. Strong profit growth has been a key driver of the rally, with the S&P 500 technology sector delivering over 50% year-over-year earnings growth in the first quarter, while full-year growth is expected to reach 47%. Outside of technology, U.S. performance was more muted, with health care and consumer discretionary the only other sectors of the S&P 500 to post gains in May.

Alongside strength in U.S. large-cap tech, economically sensitive segments also performed well. U.S. small- and mid-cap stocks delivered solid returns, supported by resilient U.S. economic data. Overseas equities were also firmly higher, led by emerging markets, which rose 11% in May and over 50% in the past year. Gains were led by technology-heavy markets such as Korea and Taiwan, which continue to benefit from strong AI-related spending.

Fixed-income assets were broadly higher, supported by declining yields and tightening credit spreads. Global high-yield bonds outperformed, gaining 1.9% in May, as credit spreads tightened on easing geopolitical tensions and continued resilience in economic data, particularly in the U.S. Canadian investment-grade bonds also posted a solid 1.4% return for the month, supported by declining yields following an April contraction in employment and softer oil prices.

What do we recommend going forward?

Anchor your portfolio to your goals. Over the past year and a half, markets have navigated a steady stream of headlines—from the 2025 U.S. trade policy overhaul to the war in Iran and rising oil prices in 2026. Despite this, markets have remained resilient, underscoring the importance of maintaining a disciplined investment approach through periods of uncertainty.

Looking ahead, we believe investors are best served by staying diversified, maintaining discipline, and anchoring portfolios to their long-term goals.

Discuss your risk tolerance, time horizon, and financial goals with your financial advisor as a starting point. These factors should guide your strategic asset allocation—the mix of stocks and bonds aligned with your objectives—which forms the foundation of your portfolio.

• Use opportunistic tilts to position for a healthy fundamental backdrop. Once you've determined the appropriate mix of stocks and bonds for your financial situation, consider the following opportunistic tilts to position portfolios for a healthy fundamental backdrop:
   
  • Overweight stocks. Consider tilting portfolios toward equities by underweighting bonds. In our view, a combination of solid economic activity and strong corporate earnings growth can provide a favourable backdrop for stocks. At the same time, with global inflation still elevated and with markets expecting the Bank of Canada, along with central banks in Europe and Japan, to raise interest rates in 2026, we see limited scope for a meaningful decline in bond yields—reinforcing our relative preference for equities.
    
    Within this equity overweight, we recommend a globally diversified approach, with exposure to both North American and overseas markets:
     
  • Overweight U.S. stocks. U.S. economic data has remained resilient despite higher oil prices and geopolitical uncertainty. Job growth has stabilized, with layoffs still limited—evidenced by low initial jobless claims and a contained unemployment rate. Manufacturing activity has also improved, with the ISM manufacturing PMI expanding for five consecutive months. Combined with strong profit growth, this backdrop underpins our constructive view on U.S. equities.
     
  • Position for continued overseas equity momentum. We see attractive opportunities in emerging markets and overseas small- and mid-cap stocks, which could benefit from easing geopolitical tensions and normalization in global oil supply over time. Emerging-market equities, in particular, have been supported by robust AI-driven demand for semiconductors, a meaningful component of the MSCI Emerging Markets Index.
• Tilt toward longer maturities within Canadian investment-grade bonds. The Bank of Canada has been on hold since October 2025, and with headline inflation rising in response to higher energy prices, futures markets are currently pricing in one rate hike by year-end. In our view, however, the Bank is likely to remain on hold in the near term, particularly as core inflation measures closely monitored by the central bank — such as CPI-trim and CPI-median — remain contained at around 2%. In addition, with real GDP contracting for two consecutive quarters and employment growth moderating, the case for near-term policy tightening appears limited in our view.
  
  Against this backdrop, we see value in tilting toward longer maturities within Canadian investment-grade bonds. With economic momentum softening, lingering uncertainty around CUSMA, and easing tensions between the U.S. and Iran, we see limited scope for a meaningful increase in longer-term yields from current levels. As of the end of May, the 10-year Government of Canada bond yield was more than 1% higher than the 3-month yield, offering an attractive pickup for investors in our view, and reinforcing our preference for longer duration within Canadian investment-grade bonds.

We're here for you

Equity markets have rallied in recent months, pushing the March pullback firmly into the rearview mirror. While the remainder of 2026 will likely bring additional uncertainty, we believe investors are best served by maintaining a disciplined approach anchored to their financial goals. Talk to your financial advisor about structuring your portfolio according to your risk and return objectives to help ensure your financial journey can remain consistently pointed toward your goals.

If you don't have a financial advisor, we invite you to meet with an Edward Jones financial advisor to explore how to piece together your investments with purpose, resilience and a forward-looking, opportunistic mindset.

Strategic portfolio guidance

Defining your strategic investment allocations helps to keep your portfolio aligned with your risk and return objectives, and we recommend taking a diversified approach. Our long-term strategic asset allocation guidance represents our view of balanced diversification for the fixed-income and equity portions of a well-diversified portfolio, based on our outlook for the economy and markets over the next 30 years. The exact weightings (neutral weights) to each asset class will depend on the broad allocation to equity and fixed-income investments that most closely aligns with your comfort with risk and financial goals. 

Diversification does not ensure a profit or protect against loss in a declining market.

Opportunistic portfolio guidance

Our opportunistic portfolio guidance represents our timely investment advice based on current market conditions and a shorter-term outlook. We believe incorporating this guidance into a well-diversified portfolio may enhance your potential for greater returns without taking on unintentional risks, helping to keep your portfolio aligned with your risk and return objectives. We recommend first considering our opportunistic asset allocation guidance to capture opportunities across asset classes. We then recommend considering opportunistic equity sector and Canadian investment-grade bond guidance for more supplemental portfolio positioning, if appropriate.