Three economic trends to monitor as we head into the second half of 2026

Key Takeaways:

• The U.S. and Canadian economies have faced their share of challenges this year, including geopolitical uncertainty and a sharp rise in oil prices. However, despite the volatility, economic growth has remained largely resilient, with both U.S. and Canadian GDP growth expected to rebound in the second half of the year, after a softer start to the year.
• As we head into the second half of the year, we are watching three trends that we think will likely drive the direction of these economies: The strength of the labour market, the path of oil prices, and what direction the central banks decide to take interest rates.
• In this backdrop, we believe that stock markets can continue to outpace bond markets as we head into the final months of the year. While we may experience some volatility and market rotation, we continue to favour U.S. large-cap and mid-cap stocks, alongside emerging-market equities.

The U.S. and Canadian economies have certainly navigated a fair share of challenges in 2026, including geopolitical uncertainty, fluctuations in energy markets, and ongoing questions surrounding the path of monetary policy. Despite these headwinds, economic activity has remained resilient, with modest at- or above-trend growth expected in the second half of the year.

As we enter the second half of the year, we are watching three key trends that we think are likely to shape the economic and market outlook: the health of the labour market, the path of oil prices and gas prices at the pump, and the direction of interest rates set by the Federal Reserve and Bank of Canada. Read below for our views on each of these three key variables and what this means for investors overall.

1. The labour market is trending better:
   Overall, in our view, the U.S. and Canadian labour markets in 2026 can be characterized as bumpy but generally have surprised to the upside more recently. Some might even call these "Goldilocks" job markets, ones that appear not too hot and not too cold.
   
   In the U.S., last week's June jobs report was further evidence of this Goldilocks trend. While job gains came in at 57,000, below expectations of 113,000, we also saw the unemployment rate tick lower to 4.2%. In addition, wage gains of 3.5% year-over-year were in line with expectations and have not moved meaningfully higher this year, helping keep core inflation relatively contained.
   
   More broadly, we have seen job gains in 2026 thus far outpace job growth from last year. On average, monthly jobs gains in the U.S. this year have been about 92,000, versus an average of about 9,700 last year. The steady labour market and pick-up in job gains is supportive of household consumption, although some of this has been offset by higher prices and inflation broadly.

Similarly, in Canada, the May jobs report came in well above expectations. Jobs added were about 88,000 versus expectations of 10,000, and the unemployment rate fell to 6.6% from 6.9%, driven by additions in full-time work. The expectation for next week's June Canadian jobs report is for a softer 10,000 jobs added, but the unemployment rate is expected to hold steady at around 6.7%.

2. Oil prices are falling – will gas prices follow?
   The second notable trend to watch as we head into the second half of 2026 is the path of oil prices and gas prices at the pump. The U.S. and Iran continue to make some progress toward negotiations, albeit no definitive peace agreement has been achieved. Nonetheless, traffic through the Strait of Hormuz has picked up, and markets continue to appear cautiously optimistic on the path of oil prices, especially as global economies focus on increasing supply and strengthening supply chains.
   
   As a result, we have seen WTI oil prices fall substantially in recent weeks. In fact, WTI oil has fallen back below $70, near levels prior to the start of the Iran war. However, gas prices at the pump in both the U.S. and Canada have not fallen nearly as fast as crude oil prices and typically operate with a lag. This is largely because gas stations need time to work through older, higher-priced inventory. If history is a guide, we could see gas prices at the pump follow suit in four to eight weeks. This would bring some relief to consumers as they head toward the final months of the year.

3. The U.S. Federal Reserve and Bank of Canada may remain on hold for now:
   The third trend to monitor is what direction the Fed and Bank of Canada take interest rates as we head toward the back half of the year. At the June FOMC meeting, new Fed Chair Kevin Warsh indicated that bringing inflation down was a key priority for the Fed. 
   
   In addition, while there was a unanimous vote to keep interest rates steady at the June meeting, the committee seemed split on the direction of rates for the rest of 2026. In fact, about nine members indicated it was appropriate to raise rates one or two times for the rest of the year, while nine members felt it was right to keep rates steady or even cut one time this year.

Similarly, in Canada, the expectation in the last couple months had been that the Bank of Canada (BoC) may consider raising rates given the energy price shock and rising inflationary pressures. However, given the recent cooling in energy prices, combined with a Canadian economy that experienced slightly negative economic growth in the first half of the year, most forecasts now call for the BoC to remain on hold this year.

In our view, both the Fed and BoC are likely to keep rates on hold for the remainder of 2026. While inflation remains elevated, we know oil commodity prices have come down, and breakeven inflation rates remain well anchored. We think the central banks are likely to closely monitor the data in the months ahead, on both inflation and the labour market, before committing to a path forward.

What does this mean for investors?

As we head into the second half of the year, we believe the three trends highlighted above set the stage for a sound economic backdrop: A labour market that is steadying, inflation and gas prices that have perhaps peaked and should start to ease, and a Fed and BoC that are likely to keep rates on hold.

In this backdrop, we believe that equities can continue to outperform bonds. Within stocks, we remain overweight U.S. large-cap stocks, which offer exposure to the ongoing AI and technology growth theme, and U.S. small and mid-cap stocks, which we think have scope for further catch-up. We recommend neutral weightings in Canadian large-cap, mid-cap and small cap stocks.

And from a regional perspective, we continue to remain overweight emerging-market stocks, alongside U.S. equities. We believe that emerging-market equities can offer an alternative to U.S. technology exposure and also will benefit from robust 50%+ earnings growth this year.

As always, your financial advisor can help establish your investment allocations so that they are in line with your personal risk preferences and financial goals, and help ensure you are on track to achieve those goals, regardless of what the back half of 2026 may bring.

Mona Mahajan
Investment Strategist

^{Source for all data in commentary: Bloomberg}