A new year, with hopes for change (and more of the same)

For many, 2025 may be easy to look back on as a year to forget. Canada’s trade relationship with its closest partner was thrown into turmoil by U.S. tariffs, businesses struggled to adapt to a rapidly changing environment, and economic growth showed increasing precariousness. From a financial markets perspective, however, we might like to see more of the same in 2026, as equity markets pushed higher around the globe, while commodities and fixed-income investments were also positive.

In Canada, the S&P/TSX composite delivered a robust gain in the fourth quarter, finishing 2025 near an all-time high and outpacing global developed-market peers. Despite the U.S. tariffs, Investors were encouraged by resilient economic growth, healthy corporate profits, and continued interest rate cuts by the Bank of Canada (BoC). Financial stocks benefited from the low-interest-rate environment, while the materials sector advanced on rising prices for precious and industrial metals. The rally helped Canadian stocks achieve a double-digit return for the third consecutive year and the fourth in five years.

U.S. stocks also posted a third straight year of double-digit gains, supported by solid corporate fundamentals, a resilient economy, and falling interest rates. During the fourth quarter, the U.S. Federal Reserve (Fed) cut its policy rate by 50 basis points, signalling support for a cooling labour market. After strong gains in October and November, stocks were flat in December as optimism over a “soft landing” was tempered by the Fed’s hawkish outlook for 2026. Profit-taking and portfolio rebalancing added modest pressure. Late in the quarter, investors rotated from AI-driven and mega-cap stocks toward small-cap, mid-cap, and value names. Within the S&P 500, healthcare led, while utilities and real estate lagged.

Source: Manulife Investment Management, as of December 31, 2025. It is not possible to invest directly in an index. Past performance does not guarantee future results. 

World equity markets posted solid gains during the quarter, marking a third consecutive year of double-digit returns. After early volatility tied to concerns over an AI bubble, markets rebounded to new highs by year-end. Declining inflation allowed the Fed to lower interest rates cuts and wind down its balance sheet reduction. Robust corporate earnings and positive global economic growth added support. Europe and emerging markets led performance, while the U.S. and developed Asia struggled.

The broad market strength extended to bond markets, which advanced during the fourth quarter, driven early by the rate cuts in North America and by easing inflation in Europe, which lowered yields. North American bonds led gains, while Asia-Pacific declined on sharply higher yields in Japan and Australia. European bonds were mixed but ended slightly positive. High-yield and investment-grade corporates outperformed, while sovereign bonds lagged.

From roller-coaster to adaptation

This mix of uncertainty and rising markets ultimately made 2025 a bit of a roller-coaster ride. While there is still uncertainty surrounding tariffs and economic growth, we are looking to 2026 as a year of adaptation. This involves more trade with international markets, and expectations that last year’s interest rate cuts and government industrial policies will begin to bear fruit.