From excitement to scrutiny  

Over the past two years, equity markets have been driven largely by earnings growth from a relatively small group of technology companies. Forward earnings for the S&P 500 are currently near $310 per share and are expected to rise further this year. In other words, much of the rally has been supported by real profit growth, not simply speculation.

However, that growth has been concentrated. A small number of companies account for a large share of overall market earnings gains. When that happens, markets become more sensitive to any disappointment.

Last year, companies were rewarded for announcing new AI-related investment. Today, investors are asking harder questions. Will the billions being spent on data centres and AI infrastructure translate into sustained profits? Or could some of that spending prove excessive?

Technological shifts rarely unfold smoothly. Periods of heavy investment are common. The challenge for investors is distinguishing between short-term over-exuberance and long-term structural opportunity.

The macro backdrop: Still expanding, but less forgiving  

United States: Strong growth, but narrower margins

The U.S. economy continues to show resilience.

Private payrolls rose by 172,000 in January and the unemployment rate declined to 4.3%. On the surface, the labour market remains healthy.

However, most of those new jobs were concentrated in health care and social assistance. Outside those areas, hiring has been more modest. This suggests that while employment remains solid, growth is not as broad-based as the headline number implies.

Consumer spending remains steady, supported in part by business investment in AI-related equipment. However, inflation has not fully returned to the Federal Reserve’s 2% target. Core inflation is closer to 3%, which means the Fed may have less room to cut interest rates than markets expect.

In practical terms, this means that borrowing costs are unlikely to fall dramatically in the near term. That reduces the margin for error in both the economy and financial markets.

Canada: Longer-term potential, near-term constraints  

Canada’s long-term outlook is improving. Economic growth is expected to average roughly 2% over time, supported by improving productivity and the gradual adoption of AI technologies.

We also expect long-term interest rates in Canada to settle at levels higher than those experienced in the decade following the financial crisis. In plain terms, the era of ultra-low mortgage and borrowing rates is likely behind us.

This matters because Canadian households carry relatively high levels of debt. Higher interest rates increase sensitivity in housing and consumer spending.

While Canadian equities have shown resilience at times, recent commodity strength has been narrowly concentrated, particularly in gold and precious metals. Gold often performs well during periods of uncertainty, rather than during broad economic acceleration. That suggests recent strength has been defensive in nature rather than driven by widespread industrial growth.

At the same time, the Canadian stock market remains heavily weighted toward financials, energy and materials, with limited exposure to AI infrastructure and technology supply chains.

Global picture: Higher borrowing costs and less policy cushion  

Across developed markets, demographics remain challenging and government debt levels are elevated. Long-term interest rates are likely to remain structurally higher than in the ultra-low-rate period following the global financial crisis.

In practical terms, this means governments and central banks may have less flexibility to respond aggressively if growth slows. Historically, that environment tends to produce more market volatility.

This isn’t a recession forecast. It’s a recognition that markets may face fewer policy safety nets than in the past.

Valuations: Less room for disappointment  

Equity valuations remain elevated compared to long-term averages. When stock prices are high relative to earnings, markets become more sensitive to negative surprises.

History shows that market corrections are often manageable when financial systems are stable. Today, corporate balance sheets remain solid. However, elevated valuations mean the margin for error is thinner than it was when interest rates were near zero.

Our portfolio Positioning: where we see relative opportunity  

AI’s impact isn’t uniform globally. Our regional positioning reflects where earnings momentum, structural exposure and capital depth are strongest.

Overweight: United States  

We remain overweight U.S. equities.

The U.S. continues to lead in earnings growth and AI-related investment. Its capital markets are deep and well positioned to finance innovation at scale.

While valuations are elevated, we believe underweighting the primary engine of global earnings growth carries greater long-term risk than maintaining exposure with disciplined diversification.

Underweight: Canada

We remain underweight Canadian equities.

Recent strength in commodities has been concentrated in gold, rather than broad-based industrial demand. The Canadian index remains concentrated in sectors that are more sensitive to interest rates and global commodity cycles.

Given Canada’s rate sensitivity, household leverage and sector composition, we believe relative earnings momentum remains more limited compared to the U.S. and select emerging markets.

Underweight: International developed markets

We remain underweight developed markets outside North America.

While valuations may appear more attractive, earnings growth has generally been weaker and structural exposure to AI and semiconductor supply chains is more limited.

Higher borrowing costs globally also reduce the valuation tailwinds that supported these markets during the previous low-rate environment.

Overweight: Emerging markets (selectively)

We maintain an overweight to emerging markets with selectivity.

Emerging market exports grew at one of their fastest rates in 15 years in 2025. Financial vulnerabilities have declined in many countries, and inflation has fallen meaningfully in several regions.

However, growth varies widely by country. Overall emerging market growth is expected to slow to roughly 3.5% in 2026–27.

We see the most compelling opportunities in parts of Asia, particularly in markets tied to technology supply chains and AI-related demand.

This isn’t a broad commodity trade. It is a selective allocation toward markets positioned to benefit from structural technology investment.

Conclusion: Positioned for resilience, not predictio 

The reverse murder mystery continues.

AI will reshape industries. Some capital will be misallocated. Earnings leadership will likely broaden over time, but not without volatility.

The U.S. remains the primary engine of earnings growth. Canada’s recent strength has been defensive and narrow. International developed markets face structural constraints. Select emerging markets offer differentiated growth opportunities.

Our objective isn’t to predict the next short-term casualty.

It’s to construct portfolios that participate in structural growth while remaining resilient in a world of higher borrowing costs, narrower margins for error and more frequent volatility.

Corrado Tiralongo (he/him)
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management