2026 Market Outlook | Manulife Wealth and Asset Management

In many ways, an investor's job is like that of a racecar driver: to outperform while managing risk. In a year like 2025, with markets in fifth gear and maximum risk-taking often rewarded, it can be nearly impossible for a disciplined investor to keep up. Heading into 2026, we see more opportunities for risk-managed strategies to add alpha to portfolios, and we expect “drafting” the market – rather than attempting to set the pace in the lead car – to benefit many investors.

2025: markets have been on a straightaway

This year has been a short-term investor’s dream: trend following, momentum trading, and lower-quality areas of the market (e.g., unprofitable tech companies, retail favorites, gold producers, and crypto-related assets) have led the way for much of the year. Seemingly every day, a new announcement of an artificial intelligence (AI) investment causes equity markets to rally, despite historically extended valuations. The phenomenon is global, as non-U.S. markets such as Spain and South Korea have delivered outsized gains in 2025,¹ even though economic and earnings growth in those countries remains lackluster.

In our view, technical trends, market momentum, investor sentiment, and retail participation have been the primary drivers of the extraordinary short-term performance across riskier markets.

Why has sentiment been so positive this year?

The Fed has embarked on a rate-cutting cycle, even though the U.S. economy is still in decent shape and inflation has yet to drop back down to the central bank’s 2% target. These preemptive rate cuts, designed to prevent a recession, are contributing to risk taking as U.S. financial conditions ease.
Analysts have continued to revise their corporate earnings estimates higher, recently forecasting 14.2% year-over-year earnings growth for the S&P 500 Index in 2026, 13.0% for the S&P/TSX Composite Index, 9.0% for the MSCI EAFE Index, and 13.0% for the MSCI Emerging Markets Index.²
The U.S. dollar (USD) has suffered one of its steepest declines in recent history, falling over 8% year-to-date as of this writing.² A weaker dollar acts as a liquidity release valve, helping riskier assets (most notably, international stocks priced in USD) surge higher.
Fiscal stimulus announcements across the globe have also fueled investor optimism, including the One Big Beautiful Bill Act in the United States and defense spending proposals in Germany after years of fiscal austerity.
Gold has risen dramatically in 2025, amid heightened global geopolitical tensions, political uncertainty, and concerns around some governments’ easy monetary and fiscal policies.

What are some risks to keep an eye on?

We believe U.S. stocks are more or less priced for perfection: At time of writing, the S&P 500 Index was trading at nearly 22.5x forward earnings, flirting with the all-time high of 24.0x in 1999 (although we’d argue that the composition of the market is vastly different today than it was in 1999).²
The “priced for perfection theme” is also evident in the S&P/TSX Composite Index, which is trading at nearly 19x forward earnings, well above its 5- and 10-year historical averages of 16x and 17x, respectively.³
The financials sector, which accounts for nearly a third of the S&P/TSX, is up ~ 25% year to date, while the materials sector (17% of the index) is up nearly 70%. Shopify accounts for nearly 6% of the index and is up almost 60%. These three themes comprise nearly 80% of the index’s year-to-date returns.³ Historically, the catalysts that have led the S&P/TSX Composite Index to all-time highs have rarely been meaningful contributors moving forward.

Earnings will likely drive global equity performance over the next year

Chart showing forward P/E ratios over the past 20 years, including 10-year averages, 5-year averages, current levels, and 5th/95th percentiles for the following global equity indexes: S&P 500 (market cap), S&P 500 (equal weighted), S&P/TSX Composite, Russell Midcap, MSCI Emerging Markets, MSCI Europe, and MSCI EAFE. — Source: S&P Global, Manulife Investment Management, as of 10/20/25. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. The S&P/TSX Composite Index is the benchmark Canadian index that tracks the performance of companies listed on the Toronto Stock Exchange (TSX). The Russell Midcap Index tracks the performance of approximately 800 publicly traded mid-cap companies in the United States. The MSCI Emerging Markets (EM) Index tracks the performance of publicly traded large- and mid-cap emerging-market stocks. The MSCI Europe Index tracks the performance of large- and mid-cap stocks of developed-market companies in Europe. The MSCI Europe, Australasia, and Far East (EAFE) Index tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. It is not possible to invest directly in an index.

High-yield bond spreads – a measure of how much risk is priced into the credit markets – are now near historically tight levels, at under 3%,⁴ and have very little room to narrow further, in our view.

High-yield bond spreads are currently tight by historical standards

Line chart showing average option-adjusted spreads (OAS) from 2000 through November 2025 for both the Bloomberg US Aggregate Corporate Index and the Bloomberg US Aggregate Corporate High Yield Index, with both (the latter in particular) currently at tight levels relative to their historical averages. — Source: Macrobond, Manulife Investment Management, as of 11/7/25. The Bloomberg U.S. Aggregate Bond Index tracks the performance of U.S. investment-grade bonds in government, asset-backed, and corporate debt markets. It is not possible to invest directly in an index. The Bloomberg U.S. Corporate High Yield Bond Index tracks the performance of the U.S. dollar-denominated, high-yield, fixed-rate corporate bond market. It is not possible to invest directly in an index.

There may be excessive optimism on the part of investors that the U.S. economy will experience a “no-landing” scenario – in other words, that it will simply avoid a recession this cycle.
The corporate earnings bar may be perched too high going into 2026, as many companies still need to demonstrate that they can monetize their substantial spending to date on AI capital expenditures (CapEx.)
Momentum investing, as reflected in speculative frenzies in certain markets and asset classes, may ultimately lead to a massive misallocation of investor capital.

Stock prices and earnings estimates have historically tended to move together over time

Line chart showing the historical correlation over the past 10 years between stock prices (as represented by the S&P 500 Index) and corporate earnings (as represented by the S&P 500 Index EPS forecast, next 12 months, noting that both stock prices and earnings have continued this year's upward trend in recent months. — Source: FactSet, as of 11/14/25. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index. Earnings per share (EPS) is a measure of how much profit a company has generated calculated by dividing the company’s net income by its total number of outstanding shares. YoY refers to year over year. No forecasts are guaranteed. Past performance does not guarantee future results.

Short term vs. long term: managing the tug of war

So how should investors manage the tug-of-war between short-term and often-diverging long-term market perspectives? For us, to borrow a phrase from auto racing, it’s about “drafting” the market by competing in the race without necessarily trying to set the pace. For example, fully invested portfolios with lower risk profiles, higher-quality allocations, a more defensive tilt, and a greater focus on income may make sense in today's environment.

We’re partial toward “quality at a reasonable price,” holding higher-quality stocks with upward earnings revisions, where investors are not overpaying for their earnings growth.
We endorse diversification across sectors, market capitalizations, and geographies. We believe the primary focus should be on investing in companies, not countries.
The concentration risks within indexes are also apparent in Canadian and international markets. (For example, nearly 40% of the MSCI EAFE Index is in the financials sector.⁵) We believe investors should exercise caution by not necessarily chasing the same sectors that have pushed markets higher this year.
In fixed income, we prefer quality with a mild credit bias. However, not all corporate credit is created equal. Reaching for yield “blindly” without understanding the risks could be detrimental to investor portfolios. We suggest targeting specific issues and issuers, with a focus on higher-quality high-yield bonds, along with investment-grade credit and select opportunities beyond North America, to build a diversified income-generating portfolio.
Many global central banks are likely to remain dovish, with the potential for further interest-rate cuts on the horizon if economic data weakens. Given ongoing inflation concerns and rate uncertainty, we believe managing duration exposure will be critical.

Why not just sit on the sidelines in “low-risk” cash?

Market momentum can be a powerful and persistent force, so sitting in cash can result in missed investment opportunities. In fact, the late innings of a bull market tend to produce the strongest returns, so investors could lose out on the chance to capture significant equity gains in a relatively short amount of time. We think staying invested – without reaching too far up the risk spectrum– makes sense in this (or really any) market environment.

Granted, it’s difficult for disciplined investors to find value in today’s global equity markets. In 2026, however, we expect there to be more favorable entry points as one or more market risks materialize, hopefully bringing valuations back to more modest levels. Meanwhile, for bond investors, we believe there are still opportunities to take advantage of mispriced assets. We see income as a potentially more important driver of fixed-income returns than capital appreciation in 2026.

Bottom line: it’s about finishing, not winning, the race

In auto racing, the goal is to win, which can often mean taking on undue risks. For investors, the main objective should be to finish the race, while trying to stay as close to the frontrunners as possible.

Important disclosures

¹Source: S&P Global, as of 11/30/25.
²Source: FactSet, as of 11/30/25.
³Source: Bloomberg, as of 10/31/25.
⁴Source: Macrobond, as of 11/7/25.
⁵Source: FactSet, MSCI, as of 10/31/25.

Alpha measures the difference between an actively managed fund's return and that of its benchmark index. An alpha of 3, for example, indicates the fund’s performance was 3% better than that of its benchmark (or expected return) over a specified period of time. Forward price-to-earnings (P/E) ratio is a stock valuation measure comparing the current share price of a stock with the underlying company’s estimated earnings per share over the next 12 months. Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. Duration measures the sensitivity of a bond's price to a change in market interest rates.

The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. The S&P/TSX Composite Index is the benchmark Canadian index that tracks the performance of companies listed on the Toronto Stock Exchange (TSX). The MSCI Europe, Australasia, and Far East (EAFE) Index tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. The MSCI Emerging Markets (EM) Index tracks the performance of publicly traded large- and mid-cap emerging-market stocks. It is not possible to invest directly in an index.

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