Episode 113: 2025 in the rearview—are markets in for another strong year?

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Kevin Headland

Commentaries for general information purposes only. Clients should seek professional advice for their particular situation.

Kevin Headland

The Netflix show Drive to Survive has created F1 fans seemingly out of nowhere. The buzz that show has created has many people jumping on the bandwagon of being F1 fans. In some ways, we could say the same for Marcus this year. Whether it was bitcoin, gold, meme stocks, tech and AI or even Europe. But you're jumping on bandwagons trying to chase the next hot thing.

Kevin Headland

Should jumping on the next hot thing really be a successful, repeatable investment plan. In today's episode of Lessons Unplugged, we are joined by our colleagues from Manulife, John Hancock, to discuss our 2026 outlook. We prefer to be driving the lead car, then trying to take undue risk to try and pass just to win one race. After all, it's a total points over the season that wins the championship.

Kevin Headland

Listen on. This is Investments Unplugged.

Kevin Headland

Welcome back to Investments Unplugged. I am your co-host, Kevin Headland, chief investment strategist or co-chief investment strategist.

And with me, as always, is my other co-host Macan Nia, Macan, how are we doing? Very well. That's the second time, Kev, you said chief investment strategist. Over the last couple of months, I think you're sending me, sending me signals.

You want to get ready? I was just in, talking with some correct advisors, and they keep, they don't don't know you very well or at all. So, they were telling you about that, so it's just, confusing for me.

But I'm excited about today's episode.

It's, we have a special guests today.

The co-chief investment strategists at John Hancock.

Manulife or Manulife John Hancock. I'm not sure what it's called anymore.

Matt Miskin and Emily Roland, thanks for joining us. Nice, first timers on the on the podcast.

Emily Roland

So happy to be here.

Matt Miskin

Thanks for having us.

Kevin Headland

It's great to, introduce you guys to our, our Canadian audience. I know, Emily, you've been out in Canada a few times talking to, you know our advisors.

So, happy to have you guys on the call now. You know, obviously, you know, this year has been a no. Short of investors, a short term investors dream, trend following momentum trading.

I retail favorites. Crypto in Canada's been gold. And, financials in Europe has been financials.

It's been a great year for that short term investors.

The key as I think is are things going to continue. What are we seeing for 2026.

As I said, I mean, front and center, especially over the second half of the year, mostly every day since we were getting announcements about new AI investments. And that's kind of been,

the market's up. And then if there's a announcement a little negative, it's been driven,

lower.

I think right now, I think companies make up roughly 30% of the Sp500. It's despite the pullback we've seen in November,

valuation is at a record or near record highs on a forward PE basis, most because of concentration concentration tech.

Matt, you know, what are we seeing? And I do expect this to kind of be the driver of US markets in 2026.

Matt Miskin

Yeah. So what we're seeing is booming earnings growth Kevin. And you know at the end of the day stocks follow profits which if we could just keep it that simple.

But sentiment can mean things day to day. Earnings growth is the key. But as we go into 2026, there's already embedded over 20% earnings growth. So that analysts are saying you did 20% earnings growth this year.

And then you're going to do 20% on top of that. That's hard to do. You know, in an earnings world it's a always what have you done for me lately. And it's about your comps which means it goes over. It's your years how earnings are measured and it looks on okay. If you did great last year, they want you to do even better next year.

And in our view these great earnings growth are going to be hard to replicate into next year. There's a lot of pull forward of investment. There's been huge CapEx from the tech companies, which has been mostly filtered around other technology companies. So after a great year to us, it is something to continue to hold as as a high quality part of the market.

They've got great return on equity, they've got good balance sheets, but it's going to be really hard to get the returns you got this year into next year out of that part of the market. We think other parts of the market could step up and actually play a major role for portfolios in the next year, and we can certainly talk about that in more detail.

Kevin Headland

Yeah, it's good to talk about it.

On Emily's perspective. And, before we get into that, it's funny, what we've seen also is,

I also see a pyramid scheme with, AI investments where it's like, I'm going to invest in you if you buy my stuff, and then we're going to use that money to buy someone else's stuff.

It. It's kind of this,

I see, I saw an infographic on that once, and it was it was quite interesting to see that, and, you know, speaking of opportunities, where we see, as Matt mentioned, high quality, what does it really mean where we find opportunities in the US in 2026?

Emily Rolans

Yeah, Kevin, we're looking for sectors and companies that have great balance sheet.

They have good free cash flow. They've got great return on equity. Really that that high quality bucket. You know, momentum by far has been the best performing part of the market this year. As you mentioned before, technicals, have really driven markets. I mean, lots of questions about the US, but we've seen it even more, in non-U.S. markets where earnings growth and economic growth are quite modest, and you're seeing these markets up, you know, Europe up 30 plus percent.

You know, certainly the weaker dollar are helping with that.

But we want to focus on where that great earnings growth is. And frankly earnings growth prospects even though they're elevated in the United States they're the best of any companies

around the world. So we are focused there. But we do have a valuation problem. The top ten stocks in the S&P 500 represent a remarkable 43% of the index.

That is a record.

I was having a conversation, just to put it into context, when that advisor the other day that wanted to talk about investing in India,

and a lot of people, I heard that too, like, ex China. And, you know, what about the Indian stock market? We talked for like 30 minutes about it.

And then I finally said, just so you know, the Nvidia is bigger than the entire Indian stock market, you know, and it just it just sort of mind blowing to think about that concentration. So we are trying to protect against the valuation risk that's inherent up in market cap. We're leaning into the mid caps to some extent. But you're trading at about a 30% discount.

It's going to give you very different sector composition. You're going to get more industrials that are a beneficiary of the build out around AI and power demand there. You're going to get some more financials, which we're seeing benefit from M&A activity within midsize banks. Another area that we're focused on is infrastructure. So a more defensive part of the market I would call it our favorite alternative.

You're going to get toll toll roads, data centers, utility companies that are benefiting from that AI build out.

So really trying to diversify its high quality, it's quality at a reasonable price. And we're adding in a little bit more of a defensive posture as well, just to contend with, you know, potentially more moderate earnings growth. And, you know, I think we'll talk about as well some deceleration here in the US economy as we head into 2026.

Kevin Headland

Macan, and we you know, we talk about valuation. And Matt's mentioned a few times before in some of his writings that we're now at for PE ratios. They're rhyming, shall we say, with the tech bubble.

What are your thoughts on AI and tax, or could it be the bubble? Can we see a big crash here?

Macan

Yeah. When the four of us get together and we chat, it seems that there are generalities of advisor questions. Regardless of what part of North America you're from, and one that we're getting a lot given valuations are very similar to what they were during the.com. Is are there echoes or there are a lot of similarities between today and back then in 2001 aspect okay, that brings this up is the amount of CapEx spending that has happened.

So JP Morgan did, did analysis. And just to put these numbers into perspective, they calculated that to get, basically a hurdle rate of 10%, the global AI trade or investment would have to really generate roughly $650 billion of annual revenue over the next five years. So these are very big numbers. And they actually did a funny thing, too.

It's like equivalent to every Netflix subscriber spending $160 per month in perpetuity. So it's these type of dynamics or these the sound bites that have come up that have given some investors, some cause kind of similar to us back in 2018 with the whole marijuana craze. Remember the valuations back then it was the equivalent of each one of us, or each Canadian smoking a half pound of weed a year to justify those valuations. From what my friends say, that's a lot of weed, right? So it just shows you the amount that has been put into it. But I just want to remind there are a lot of differences and these are substantial differences. One is just money flow is one which is still at these levels. It's not. It's actually pales in comparison to the fund flows back in 2000 oh relative to the broader economy and even the investments themselves.

So yes, we have these massive numbers that these, mega scalers have put into their CapEx infrastructure. When you look at it relative to GDP, it still is pretty small. So even despite the announcements today and for 2026, it's essentially only 0.8% of GDP. When you compare that to the investment that was put into the hardware back in the 2000, because 1.6 telecom was 4%, and not that this matters, but when the industrial revolution happened, the railway CapEx that was equivalent to almost 4% of their GDP.

So yes, the numbers are big today, but relative to other points in time where they had been clear bubbles, we're not seeing that. Yeah. Now does it be if we don't get this rate of growth rate for the next couple of years, it doesn't become a bubble. But as of today, I think we're all very, comfortable saying is we have to be very selective to what Emily might have said, in terms of asset allocation and diversification. But by no means is this a bubble.

Kevin Headland

Yeah, I think that's the key is when we see bubble, everyone talks about bubble because it's elevated. But to me it's the only real. It's a bubble until the bubble pops. And I don't know if, you know, we're going to see a pop here.

But prudence is important when, you know, as Emily said, probably slower economic growth.

We get, higher valuation. Earnings have to keep pace with some lofty expectations. There's a lot of uncertainty here. And, Emily, when you mentioned us, you know, the US, potential slowdown are called below trend economic growth.

There's a lot of, focus right now on the fed and the, you know, the announcements the Federal Reserve's coming out with on a daily basis and, the expectations of, how fast, and how many rate cuts do we get?

How much does that matter for the US equity market right now?

Emily Roland

We think it matters a lot.

You know, some of the volatility that we've seen as of late has been around fed speak. You know, you've had some hawkish members coming out of the last, you know, month or so that have sort of spooked markets a bit here suggesting that, you know they're driving around in the fog and you know they don't have enough information to potentially, you know, cut rates.

And then you get a more dovish fed speaker coming in and supporting Mark. And so we think this is a huge narrative. You know one of the key reasons that equity markets have done well this year is you've got this sort of ideal scenario where the fed is cutting interest rates and inflation is still not to their 2% target.

We think it's getting there, but we're not there yet. It almost feels like you're you're in a class and you're failing every test. But the teacher is still passing you because inflation is still not checking the box that they're looking for. And then we're also looking, you know, at an environment where the economy's still doing okay.

You know, not perfect.

But the economy is holding in here and the fed is still indicating that they're cutting. That's an ideal scenario. We have to remember that usually the Fed's cutting interest rates because something bad is happening. And that is not the case right now. So risk assets have really responded positively to this. Goldilocks an area where the data are weakening.

They're bad enough that the fed can cut but they're not. So bad that the Fed's cutting for the sort of wrong reasons, if you will. So I think the fed is going to be really critical,

for markets in the next year if there is some type of re acceleration in growth or inflation that limits their ability to cut, and may spook markets a bit, if we see more cracks in the labor market, then what's expected?

I mean, we're looking at the U.S. jobs market right now. It's not great. We've had to rely on a lot of alternative data, data that we have been watching for some time. But things like challenger layoff tallies. The month of October saw the highest number of layoffs in the month of October and over 20 years, the Indy job openings have slowed to close to recession levels.

The survey data that we're watch is indicating that people feel jobs are hard to find. Right now. We haven't seen that translated into initial claims yet, but we do think that there's some more significant weakness in the labor market should allow the fed to cut. Hopefully they can stave off a contraction in economic activity. But as we know, hope isn't the best investment strategy out there and I know we'll get to this, but it's a key reason that we think that the income that's available on high quality bonds is especially attractive right now.

Macan Nia

And maybe to piggyback off of that, Matt, what's the team's view in terms of we kind of have a very big job opening coming up in May of next year and who that individual is and what they may or may not do within their first six months, we all believe will have a very big impact on markets, potentially to the upside or downside.

So walk or walk our listeners through how we're trying to think about that, because it is a question that we're commonly getting from and clients.

Matt Miskin

Yeah. So, the fed Chairman Jerome Powell will be stepping down.

And that is in May of next year. And so, you know, there's thoughts now that they might be incrementally hawkish because they know that the next fed chairman will likely be more dovish.

You know, at the end of the day though they have two mandates. It's relatively price price stability or 2% inflation. And then full employment, which is in essence around a 4% unemployment rate. So they're going to still have those mandates. It's still going to be a committee.

And so really this this whole, you know, if you think about the evolution of the fed, it's been more and more committee driven and consensus driven over time.

And so we still don't know how much a new fed chairman can really just take over the show.

They will have other people that will have inputs that will be out in the media speaking their mind.

And so, you know, it adds to this level of uncertainty. I think it has been a cause of volatility as of late.

So with the fed you've got all these different layers, right. So you got no jobs data, no CPI data, government shutdown. That makes your job hard. Then you've got a change in rotation within the fed in different people. So there's some that are saying 50 basis point cuts, some are saying new cuts. So there's this division within the fed.

You add it all up. You gotta focus in our view on indicators that are often more market based or private sector based. So when we're looking at is a two year Treasury yield. And what this does is it's the Treasury market and it's in the free market. And it tells you what the bond market thinks about fed policy over the next two years.

If that's going down, that usually means easy. That's going up. That usually means tightening. Right now it has been in a downtrend but it hasn't broken support. It's not like a new easing tone has been reflected in it. It's holding at about 3.5%. The low was about 3.42% this year.

But to Emily's point, you probably need weaker jobs data to kind of really tip them into a more dovish tone.

In our view, it's probably going to be regardless of the fed chair, because at that point we might have a better understanding. Okay, is this jobs data just weaker because of the government shutdown or is it weaker because we've got a problem? Is inflation from the tariffs going to be a problem that sustained in the next year, or is it a one time hit and it doesn't become a problem.

So in our view the data should be able to guide them like a North star or our story. But at the end of the day, there's a lot of complicated issues. It's like a Facebook start, Facebook relationship status. It's complicated.

We just got to be disciplined, focus on the income and watch that two year Treasury yield.

Kevin Headland

Yeah. Emily, the, you know, the fed in the policy is really, had impact, relative to the US dollar,

expecting U.S. dollar weakness and weaker economic growth. And that's really been spurring, some of this, you know, international investing outside of the US.

When you're talking to your U.S clients, what's the willingness to continue, to investing outside the U.S.?

Is this now a new diversification story? Where was U.S exceptionalism only us to no U.S early this year? Where are we sitting nowadays?

Emily Roland

Well, I think it's been a wake up call for a lot of advisors that have visors that have had little to no exposure to international markets because this year, you know, non-U.S. equities have worked in portfolios.

And when we sort of think about our views and put it in the context of the global equity market, you know, international stocks are about 30% of global markets. And I do a little survey when I talk to Roomful of Advisors, I'm like, does anybody have 30% of their portfolio in international stocks. And everybody's like, no!

Macan Nia

What is it usually Emily?

Like what what would you what would be your estimates about U.S advisors allocation to international equities.

Emily Roland

Yeah, I was going to say 15 to 20 ish lots and then 80% Nasdaq.

I'm joking. Yeah. So the I mean obviously there's the home country bias issue. I think it's also you know, if you think about the sector composition of international equities, the U.S. is like a giant tech ETF you know and international stocks. The MSCI has a 6% allocation.

And technology companies it's very cyclical. It's banks it's industrials. It's energy companies. So it's just a it's a very different type of market. And it has lagged due to the strength of technology in the United States on a relative basis.

So what we're doing is we're, you know, still recommending that investors have a portion of portfolios invested internationally.

We did make a change around halfway through this year where we had been overweight, international value versus international growth. And people are, you know, obviously worried about concentration issues. Look how broad 40% of the MSCI for value index is comprised of financial companies. And they have done incredibly well over the course of this year.

On, you know, single digit earnings growth,we're seeing just remarkable returns out of European financials.

And we started to see a shift in analysts estimates across E for growth versus E for value. So if a growth stocks we're seeing positive earnings revisions are rerating higher. And even value was starting to lag. So we have huge believers that over time stock prices follow. Profits hasn't been very helpful in 2025. But over the longer term it has, you know just because it's been such a sentiment, technical momentum driven market.

So we suggested, getting active within international portfolios and embracing international growth stocks over international value. A lot of the managers we work with here are finding opportunities in sectors like industrials and healthcare, which are growth year sectors, internationally. Tack, you're going to get a little bit more M exposure on the growth side. There's some catch up potential within Chinese technology companies there.

So just again, I think it's really important to be active there and identify high quality companies and look more to the growth side into 2026. Over the value side. There's been a lot of stock price appreciation, and we just don't want to chase returns. And some of those more speculative corners of the market.

Kevin Headland

Yeah I've been stealing a great line by Matt.

You said this earlier, I love it. I use it all the time. I say, invest in companies, not countries. The question, you know, we get all the time where the world should be invested them. And. Well, you mentioned India earlier. It's like, well, how deep is the stock market there? How easy is that meant there?

Let you know, let our active portfolio managers find the opportunities, wherever they may exist, whether it's location where their head offices and where they're looking at a stock market is not necessary, where their business or their, revenues are coming from either. So,

I think that's something that's been eye opening this year for many investors that have been focused on, on, us specifically for quite some time.

Macan, you had a comment on, international investing. Have we missed this trade or what's the what's happening?

Macan Nia

You know, I don't think when you take a step back, I want to remind our clients, to Emily's point, we haven't heard anything about India until this year. We haven't heard anything about Europe for the past five years. M China for the past five years.

Because those trades or investments had not worked for most clients. I think there's a bit of recency bias, but there's obviously grounds for that. The fundamentals are improving.

Valuation was in your favor at the beginning of the year. Now going into 2026, is it over? No, because I think a lot of those dynamics that help the international space are still in full, right?

When you look at it from a fundamental perspective, you're seeing, whether it is monetary policy that is loose. So nine out of ten, developed market central banks have been cutting rates, with the exception of Switzerland, you're seeing massive amounts of fiscal stimulus from Germany. I always call them,

fiscally. My joke is they're fiscally responsible. Like myself.

My wife calls me cheap, so they've been cheap for two decades. They're finally spending money. You have Japan with $110 billion stimulus. Canada is doing QE and two money supply globally hit a record at 140 trillion. So I think the fundamentals are still in place. The earnings are likely in place to everyone's point here. Are they a little bit elevated likely.

But we know earnings expectations come out throughout the year. And then last but not least is valuation is not in favor. But like everyone is preaching on this call active management. The entire market is not overvalued. There's still, pockets of opportunity. So do I go overweight international today versus, you know, U.S. or Canada? No, but I don't think the investment opportunity is over as we go into 2026 because the backdrop is somewhat the same, with the exception of valuations.

But you can negate for that by security selection.

Kevin Headland

Yeah, I think one of the keys, as well as I think investors have been pretty spoiled the last little while. You know, they're getting great returns out of the US and then rotate great returns of Europe. Still great returns the US. Canada has done phenomenally well this year so far.

But I think as we've mentioned in our note, this market is one where, like racing, we should be drafting,

making sure we're playing, you know, in each race. But we don't have to win each race to win along the championship over the whole season. I that's a key is not taking too much risk. And maybe dialing back our expectations is that we're going to see another 20 plus percent return, in 2026.

Still a good environment though, to be invested in equities.

Let's let's move over to fixed income. Really quickly here.

Going back to tech firms, it's kind of interesting is

I think, Morgan Stanley was saying that, tech firms are expected to use debt to finance upwards of 1.8 trillion by 2028, to finance AI investing.

We're seeing headlines already of some cracks happening in the private credit market and, some uncertainty whether, this investment in tech in AI is going to be able support,

things going forward.

Matt, we have high yield spreads and investment spreads near all time lows, yet yields are still somewhat attractive. Are we being compensated for taking on the risk right now in lower quality, fixed income?

Matt Miskin

No.

Kevin Headland

I love it, I love it.

Macan Nia

This is a podcast, and this is supposed to be about. Oh, you got to keep the listeners engaged. I sense the thing that I mean, one word,

Matt Miskin

So high yield spreads. So this is a measure of a treasury yield versus a junk bond yield. So this is below investment grade, and that is super tight.

So that's 3%. It got as low as almost like 2.6%. The lowest in history was 2007 2.3%. You're not getting compensated a lot now. It's all how you frame it though in the world of asset allocation for us. Right. So getting back to the yields, the yields are around 7% on high yields. We're getting about 6% in emerging market debt.

We're getting about 5% here in the United States on investment grade corporate bonds. So if you said hey, we can do five, six, 7% income streams, yes, you have to take greater risk, but cannot compete with equities on a risk adjusted basis and be a decent buffer there in case maybe the earnings growth aren't as strong next year.

And even though there is tech related debt, you know, Kevin, to your point, infiltrating into the the debt market it is much more diversified. You know. So in the equity world you're sitting you're saying okay so I is I mean you think about tech comm services consumer discretionary. A lot of those are really all the same trade. And that can be as much as 50, 40, 50% of the market in the debt world.

I mean, each bond is like a percent and the sector diversification is much greater.

And so, you know, in our view, it's about sector diversification. It's about asset allocation, diversification. You can do a lot in bonds. There's there's more to bonds than just, you know, government bonds. There's mortgage backed securities. There's securitized more broadly there's corporates. There's low quality corporates, high quality corporates.

There's things you can do with duration. There's so many more opportunities. But if the fed cuts interest rates or global central banks cut interest rates, which it's pretty much where we're leaning into, that usually is a supportive environment. You want to lock in yields, the number one most popular investment in the United States has been money markets for a number of years in a row, so investors have been piling into the short end, taking a t-bill, basically, in essence, with the money market.

And if that rate just keeps coming down and the fed is just chipping away at that and bringing that down, you know, what we found in our studies is that investors usually wait right there and then short until it goes to the low of the cycle. And then they buy the bonds.

And what we're just saying is now going up, let's take a look at these income streams.

Let's not take too much risk. Let's not take a lot of spread risk or credit risk. We can get it done in a relatively high quality fashion, be diversified. But that income stream might be pretty competitive.

Kevin Headland

Yeah. It's been it's been hard to, even look at bonds the last few years, given how well equity markets have done.

You're kind of like, I don't need, fixing them at all. And then you see some periods this year when volatility rears its ugly head and there's bonds protecting on the downside. And it starts to be like, well, maybe, we should be looking at bonds, a portfolio allocation. And that whole 6040 mentality is perhaps is no longer dead.

And it should be re re invigorated.

Perhaps, for, for balanced investors

Macan do you have a comment on.

Macan

No, no, no, that's exactly to your point. I think when we look at it, we get questions on what should we expect from a one year forward basis. We're going to be very conservative and just say from a fixed income perspective, put in the coupon in terms of your financial planning, you're getting 4 to 5%.

Anything above that is upside, right? But I think it's very reasonable. Even today, after the rally, we've seen in bonds that are between 4 and 8%, depending on where you're investing in the world, that five is still very reasonable. Despite this year's performance for next year.

I think one of the also things we've been looking at is,

we talked about non-U.S. or international equity investing.

There's a lot of opportunity in non-U.S. or international bonds as well.

Kevin Headland

Matt, you mentioned E.M. bonds.

Europe is somewhere we're starting to see a lot of attractiveness on on yield.

Playing some different opportunities in Europe for fixed income.

So I think investors perhaps have to look, outside traditional,

U.S or North American fixed income to, to get some income for their, for their portfolios and see again, more diversification and not just equities, but and fixing them as well.

Matt, Emily,

I want to thank you so much. We're running out of time here. Thanks for joining us today. We could we could spend more time on this.

Hopefully we'll have you back on. We'll we'll talk about other subjects.

But it's been a pleasure to have you guys on here.

Macan Nia

Actually, before we let them go, you know, the classic advisor question we're going to ask you two of it.

What keeps you, if anything, keeps you guys up at night? But what's one area that you know you're paying attention to?

With a little bit of more skepticism as we go into 2026?

Matt Miskin

Yeah, I was going to I was going to go right back to where we started. And it's a,

you know, Emily said that the S&P 500 has never been more concentrated.

You know, I just, you know, starting out in this business like the first, you know, advice, piece of advice, don't put all your eggs in one basket like you, you know, it's it's pretty simple. It comes, you know, comes around. And I mean, we, you know, we live and breathe,

asset allocation here. And if you said our April 10th stocks or basically your total equity portfolio and they all are the same trade, I, I struggle with that.

And so, you know, they wake up in the morning and it's it's really it's either tech is up and that helps the market be up or it's the other way around. It's really hard to see that. And so for us, you know whether it's health care Emily talked about industrials or mid-caps, you know it's like okay, we've got to find the best ideas we can to bring together in this portfolio.

Because if that tech trade doesn't work, we need to make sure we've got great long term return potential. Outside of that.

Emily Roland

Yeah. I mean, I would just add, you know, this one's a little more, I guess boring if you will, but in terms of keeping you up at night. But it's about that cash on the sidelines and it's you know, we did not like bonds for Matt.

And I've been doing this job together for 11 years. And for many years we were underweight fixed income because then the income was nonexistent. Remember all those years that we all spent writing whitepapers? How do you find yield in a low. Yeah, reaching for yield, you know. So we were like underweight, like we didn't hate bonds, but they didn't really offer any value.

They weren't mispriced. You know, we were in a low growth, low inflation world for a long time, which was a better scenario for equity markets. Right now equities are priced for perfection. And and not that perfect world from a macro perspective. And bonds to us are still mispriced. There's been a lot of stories that have had sort of pushed bond yields higher.

Whether it's, you know, related to the South America trade or whether it's around concerns about the debt, their stories to us, and we don't think that the bond market is sniffing out the cracks in the labor market and the disinflation that we're starting to see come from the shelter housing side of the market here. So we just want to, you know, investor psychology.

We talked about it all the time as it relates to equities. I think that we know that investors have a proclivity to sort of sell high or buy high and sell low,

or whatever, you know what I mean. And we almost never think about bonds that way. We're still digging out of the worst bond bear market that we've had in modern history, and there's opportunity there to lean in.

And if you have us back on this podcast in a year, you know, we might be back to not liking bonds again for another decade. I hope that sticks with me for that long. We'll have to see. We are both getting older, but, so I think that's to me that keep you up at night is the missed opportunity to lean into that income that's available today.

It may vanish before our eyes heading into next year.

Kevin Headland

Yeah. I mean, I think it's a great point is, is I would say chasing that risk again, you know, trying to, you know, win every race, and, and not being aware of perhaps risks that are coming outside and just being blinded by the great returns we've had so far and say, oh, it's just keep could continue.

Markets only go up forever, right? Well, they only go forever until they don't. And that's when you make a mistake of of not seeing a fixed income. And that's when we buy fixed income when we're already down. It's like bad news, bad idea.

So yeah.

And again, I want to thank you guys. Great.

Thanks so much for being on this, this podcast.

It's been a lot of fun.

And we'll definitely have you back on continue to chat more about some subjects. Okay. Thanks for having us. Great. Thanks. Our pleasure. Thanks for coming. Thanks.

So, Macan, and let's continue the discussion.

As talk more folks on on canada of course. And we focus on the US. Can in such a small component of,

global investing. So we joke that the, you know, front for them is not much of a investable universe. But our investors, of course,

still have a home country bias to Canada.

Macan Nia

So let's talk about what we're seeing in Canada. Equities.

So let's start with what's happened Canada has had or the Canadian market measured by the S&P, TSX composite as of time recording, which is towards the end of November, is up roughly 24%. Phenomenal returns. When was the last time we said the TSX had outperformed the S&P 500 or the Nasdaq years ago?

What have been the drivers of returns really kind of, as you know, three themes.

Number one is financial, in no particular order in terms of contribution, but these are the big themes. Financials have done very well relative similarly to financials across the world. So financials is one you know 33% of our index is financials. What has done very well is gold the gold sector. So the material sector I think is roughly 16% of that 14% is gold.

And that weight of gold has like ten years ago Cabos ten early sorry 4%. So the gold weight has increased tremendously because the gold price has done very well. We're up 50% this year. We've been up more than that last year. So that's one financials gold two and then Shopify. So those are the three themes that have driven I think 80% of market returns so far this year.

What's going to be the theme in 2026 for financials is the question on top of mind of obviously getting the key for Canada again is, as most markets around the world surprising or very concentrated, we know the TSX or TSX is extremely concentrated as well. It's finding the next driver of returns in 2026. And I think again, we don't dislike Canada for for investors, but I think it's a lot harder to find those opportunities.

Kevin Headland

And I think the key is going to be, again, active management focus on those individual companies that that exist on the TSX, some great companies in there. And the best part is they're diversifying away from, you know, a lot of the tech focused, markets like this, P 500.

And so you're getting some diversification, and Canada.

Macan Nia

Yeah. And, you know, similar to the global markets. But while valuations have been some driver that's surprising to you're the predominant driver has been earnings.

Right. So you know I don't mind valuations being somewhat elevated if the company's profits are material and kind of justify those valuations as we go into next year. Again I typically what will be the driver of market returns next year will be earnings for Canada.

And it's hard to not see how the financials can continue to, you know, chug along. What would they be as strong I think this story for Canada is going to be very similar, where if we had to put them in buckets like 5% bucket ranges, 0 to 5%, 5 to 10, ten and 50, so on and so forth, you could set up an environment where earnings growth and not even a multiple expansion at a dividend can get you in that 10 to 15% bucket range.

One thing when we talk to Matt and Emily about one thing I think about and I'm looking at, is with this view for the first time, it seems like forever, right, Kev, that our own home markets are doing better where they're all my Canadian investor, whether I'm a European investor, whether I'm an Asian investor. Do I look at recency bias?

Is recency bias toward where I look at my own domiciled returns? They've been very good relative to the US. The US has some questions about it. And am I more likely to keep a little bit more of that $1 I would have allocated to the US at home? So could there be a flow supporting data?

For international markets?

Kevin Headland

We'll wait and see. But I could see how that could unfold as well. That gives another, you know, tailwind for international investing. Yeah for sure. I totally agree with you. Now,

when we look you ask Matt Emily that question. So let's finish up with this. Our own two. What is keeping you up at night? Besides perhaps your family?

Macan Nia

Well, for me, it was originally who would be in charge of the Federal Reserve. Interesting. Yeah. And what they may or may not do. If you have, let's say, someone that is extremely dovish beyond what the fundamentals justify. And you get a fed funds rate that is cut by 2% within a quarter more. So,

exactly. But that's some of the

some of the talking points we're hearing that the fed, the overnight rate should be two.

At first blush, I would think markets who love that rate markets love looser monetary policy. Hence look what's happened this year. But to lose and they like you know balk at that. However that you know talking point for me has been kind of removed because I ultimately think Kev, that, you know, capital markets will course correct that. We have seen that so far in 2026, where there's been certain policy put out there, markets reacted negatively, and then those policies were re altered.

So I think that would be the case if that's it.

The fed chairman comes in cuts rates. The two markets react negatively. Then you see that response.

So that's one. But other than that again cap there's going to be hiccups along the way. What I do know is the fundamental backdrop, while not stellar, it's below trend growth, which is still positive.

I know most central banks across the world, two thirds of them are cutting rates that will be stimulative. Earnings are decent. And valuations, you know though that's the one area. But valuations is a terrible near-term predictor. So there's not really not say anything keeping me up at night. I'm just you know I hope that we continue to get this selloff that we're experiencing right now because that actually sets us up for much more success in 2026.

If we're starting from a more of a elevated area where sentiment is a little bit more subdued than what it would be today. Yeah. I think one of the things that you say is,

Kevin Headland

say, you know, for 2026, we always have these outlooks and views for the year, but we don't invest, you know, Jan one to December 31st.

So it's this volatility that we experience right now is one where it just reminds people to again,

perhaps be a bit prudent with their investments.

You talk about below trend economic growth.

For me keep me up at night against some of the risks I see.

It more domestically is our economy, the economy, if it does stumble, if it does get weaker again, that should read through to, banks and financials as they have to increase loans, provisions and whatnot.

So that's something to be keeping an eye on. Is is what the supported metrics are for the economy.

The spending continue.

What is that going to do? And of course, that changes the mindset of investors as well.

If they're,

fearful about their jobs or whatnot. That read through to whether they're, you have extra money or are willing to invest in the markets and that just a, snowball effect,

Macan Nia

I'm going to actually push back on you on that cap, because I specifically for the TSX, is a perfect example of when we invest in the TSX, and you're always the first one to say this.

We're investing in companies, not the country. So the economic backdrop for Canada has been weak this year. Manufacturing services, employment, retail sales has go through the list. But despite that, the TSX has turned out 24%. So even in a backdrop, I know it becomes more difficult if we're getting a more a bigger slowdown. But when you look at Canada specifically, investing in the broader economy is not the same as investing in the TSX.

But I, I get your point in that sense that, you know, markets are priced for perfection. Yeah, just a little bit of negative chink to that armor. And we've seen that in the US. Just some you know silver not digested not silver linings but you know US job growth creation some cracks. It has investors you know rethink valuations as a medium term predictor.

Yeah I think we get keep going onon this topic. It's time for quite a while.

We're probably a little longer than normal.

But I think it's a result of having a to, additional,

guests on our podcast. This has been a lot of fun.

Thanks very much for listening. Again.

If you find this useful, please,

rate us, please reach out or, share with like minded.

Friends or colleagues, to join our, our podcast. And please subscribe.

It really helps. The numbers and when you whether it is Spotify or Apple Podcasts have a saved automatic download, it helps us with our numbers with the broader audience.

So if you could do that, that also be very helpful. And also as well,

for those who are interested in reading our outlook,

and ensuring that, we have a few points on the mainly investments website, that you can read,

our outlook, for 2026. So thanks very much for listening. Once again for, myself,

it's been a great time. And,

Macan as always, Yeah. Thank you for listening. Thanks again. Take care of one.

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