Weekly market wrap

Four New Year's Resolutions for Investors 

Key Takeaways:

• As is customary this time of the year, we have come up with some resolutions for investors that we hope will put them in good stead for whatever 2026 has in store.
• First, we recommend a check-in on the health of the Canadian and U.S. economies in early 2026 to provide a cross-check of optimistic market expectations.
• Second, investors should consider deploying excess cash over time, based on their risk tolerance, investment objective and time horizon. With interest rates down significantly from their peak and offering little to no pick-up over inflation, stocks and bonds may offer better returns.
• Next, we think investors should target a well-diversified portfolio that includes international equities across the capitalization structure, alongside domestic investments, helping to spread risk and take advantage of broadening earnings.  
• Finally, 2025 provided a lesson that investors should avoid playing politics with portfolios, with markets delivering robust returns despite a barrage of policy headlines. This mantra is worth repeating in a U.S. midterm year and with CUSMA up for renegotiation.
• Of course, everyone's resolutions will look different, and your financial adviser can tailor these recommendations to keep you on track towards your long-term goals.  

2025 is in the record books, and it’s the time of the year to consider resolutions for the year ahead. We've come up with four that should help investors prepare for whatever 2026 brings.  

1. A health check 

We don't mean a trip to the gym. Instead, it will be important to check the temperature of economic growth early in the new year.

This will be particularly important in the U.S. as data disruptions through late 2025 start to clear. A shuttered Bureau of Labor Statistics (BLS) was unable to publish a full labour report in October, and the statistics agency has acknowledged that the quality of the data released for that month and November were lower than normal*. This aligns with ambiguous signals from the data: private hiring seemingly improved through the fall, but the unemployment rate rose**. 

Against this backdrop, markets will, in our view, pay even more attention than usual to December's payrolls report, released on Friday, as it provides the first uninterrupted reading of the labour market since September. Hopefully the data will offer more clarity. 

Similarly, December Consumer Price Index (CPI) data in the U.S., released in mid-January, will give a cleaner read on inflation. The BLS was unable to release October figures due to missed data collection, and these issues also affected November, with a surprisingly large slowdown in inflation partly attributable to missing data**. 

Canada has, of course, not seen the same issues with data collection, but recent statistics have provided some surprises. In particular, the recent trend in employment has been far stronger than anticipated, driven in part by a rebound in part-time work following cuts in this type of employment through the summer. These swings make it harder to parse the underlying trend in the labour market, and it will be fascinating to see if the recent improvement in hiring persists in this Friday's employment report.  

Importantly, these data will provide an early check of market expectations for 2026. Consensus is looking for solid activity rates to underpin a broadening in corporate earnings growth. Data that corroborate these expectations are likely to be well received, but curveballs could spark an early reassessment of market pricing. 

2. Make your cash work for you

U.S. interest rates have fallen 175 basis points (1.75%) from their peak in 2024**, and we think they will drop further this year. 

This is not a completely straightforward call, with inflation still running on the hot side. In early 2026, it will be a full five years since price growth was at, or below, the Fed's 2% target**, and "several" Federal Open Market Committee (FOMC) members are uncomfortable cutting again until they have seen more meaningful progress, according to the December Fed meeting minutes***. 

However, elsewhere on the Fed's rate-setting committee, there is more confidence in the inflation outlook. The majority expects shelter inflation to cool further, while some have highlighted that firms are reluctant to raise prices at present given softer demand***. Importantly, while tariffs are expected to continue to push goods prices higher in coming months, the Fed sounds increasingly confident that pressures will prove temporary***. 

The upshot is that, barring nasty surprises, the Fed will remain inclined to cut, in our view. Markets are pricing two 25 basis points (0.25%) cuts this year**, which would bring rates close to 3%, a level at which the Fed thinks policy is neither stimulating nor weighing on the economy***. We broadly agree with this pricing and think the Fed will move once or twice more, bringing rates to the 3-3.5% range. 

The drop in Canadian interest rates has been even larger at 275 basis points (2.75%), with the Bank of Canda moving more quickly to ease policy in the face of sluggish domestic growth. We don't expect any additional cuts in Canada, but at just 2.25%, interest rates are already providing very little pick-up over domestic inflation. 

With the returns on cash looking increasingly unattractive it is a good time to consider adding to strategic allocations in bonds and equities that are expected to provide notably better returns in 2026. 

3. Focus on diversification 

The scale of outperformance in U.S. mega-cap technology stocks through this bull market has been striking. Over the past three years, the Magnificent Seven group of companies has risen 325%, far outpacing the approximately 80% gain in the broader S&P 500 index, the 63% rise in the Canadian S&P/TSX index, the 50% increase in the Euro Stoxx, and the 95% increase in the Nikkei**. 

This run has been aided by a couple of forces, in our view. First, of course, breakthroughs in AI technologies have underpinned substantial earnings outperformance for these companies. Second, from a global perspective, U.S. assets have been in vogue due to their robust domestic growth dynamics, with this so-called U.S. exceptionalism pushing the dollar higher, adding to gaps in dollar returns between domestic and international equities**. 

However, there are signs these forces are running out of steam. 

Domestically, solid earnings growth is expected across all eleven S&P sectors. And while technology companies are expected to lead again, the gap between these and others is narrowing with financials, consumer discretionary and industrials all expected to generate double digit earnings****.

Internationally, the gap between U.S. growth and international growth has now closed, helped by an improvement in international activity and some moderation in growth on the U.S. side****. Alongside this pickup in the macro picture, international earnings growth is expected to improve in 2026****. 

Finally, the dollar shifted from a headwind for international equity returns into a tailwind last year in the wake of a 10% depreciation in trade-weighted terms**. We think a flat or slightly weaker greenback adds to the case for more international exposure in 2026. 

Taken together, while diversification is always an important tool in portfolio construction, we think there is an especially strong case in 2026 for allocations across overseas developed- and emerging-market stocks, alongside the attractive opportunities we see within U.S. stocks.

4. Don't play politics with your portfolio 

Politics and policy were in focus last year as the new U.S. administration introduced sweeping trade policy changes – with significant implications for the Canadian economy. At times, the uncertainty triggered by these adjustments sparked sharp bouts of market volatility, most memorably a sharp correction in major equity benchmarks in early April**. However, despite these wobbles, markets went on to deliver robust returns over 2025**. 

We suspect that there will be fewer fireworks on the trade policy front in the second year of the U.S. administration. Indeed, following a large reset in tariffs in 2025, we think these will be relatively stable this year, even if we see isolated spats around certain product lines. 

Admittedly, there is significant uncertainty over the renegotiation of the CUSMA agreement scheduled for 2026. President Trump has threatened to leave the deal he signed back in 2020 that underpins the majority of North American trade**. Further grandstanding is to be expected during these negotiations, but we expect these negotiations will lead to modifications of this trade deal, as opposed to any drastic rewriting or collapse. 

Still, we can't rule out fireworks, particularly south of the border where midterm elections are coming into focus. Investors will likely be watching the polls carefully to see if Republicans can maintain their control of Congress, or if they might lose either the House or the Senate, which could lead to policy gridlock given wide divisions on policy between Republicans and Democrats. 

However, it is important not to overreact to noise on the policy front or allow personal views around politics to dictate investment strategies, in our view. Instead, investors should look to keep their focus on building a well-diversified portfolio aligned with their financial goals. 

Check in with your financial advisor

Of course, everyone's resolutions will look slightly different depending on their circumstances and goals. Your financial adviser can help tailor these recommendations to make sure you remain firmly on track in 2026 and beyond. 

James McCann
Senior Economist 

Weekly market stats

^{Source: FactSet, 1/2/2026. Bonds represented by the Bloomberg Canada Bond Index. Past performance does not guarantee future results. *Morningstar Direct, 1/4/2026.}

^{*BLS
**Bloomberg
***Federal Reserve
****FactSet}
 

The week ahead

Important economic data for the week ahead include employment data in Canada, and employment, housing, PMI and sentiment data in the U.S.