Market Overview
If the first quarter of 2026 tested investors’ patience, the second quarter rewarded it. Markets staged one of the strongest quarterly recoveries in years, as the two forces that weighed on Q1 both turned favourable: the U.S.-Iran conflict moved toward resolution, and the fears of AI disrupting corporate profits gave way to renewed enthusiasm about AI investment.
The turning point came quickly. In mid-June, the U.S. and Iran signed a memorandum of understanding aimed at ending the four-month conflict. Oil prices, which had surged above $110 per barrel at the height of the crisis, retreated to roughly $70 by quarter-end, back to pre-conflict levels. As the geopolitical premium came out of energy prices, it flowed back into risk assets.
The S&P 500 gained nearly 15% in Q2, its best quarter since 2020. The Canadian market added roughly 7%, notching its eighth consecutive quarterly gain, the longest such streak in three decades. Emerging markets did even better, surging over 24%. Importantly, the rally broadened as the quarter progressed: small caps, value stocks, and cyclical sectors all reached new highs alongside the technology names that led the initial rebound.
Not everything went up. Gold, the standout performer of Q1, fell sharply as safe-haven demand faded. Commodities broadly gave back a portion of their first-quarter gains. And in a notable shift, markets moved from expecting interest rate cuts to pricing in potential rate hikes, as a new, more hawkish leadership took the helm at the U.S. Federal Reserve.
For investors, the quarter carried a familiar lesson: those who reacted to the alarming headlines of March missed the recovery of April, May, and June. Staying invested through volatility, in a portfolio built for your risk tolerance, remains the most reliable path through markets that can swing this widely, this fast.
This commentary reviews the key drivers across Canadian, U.S., and international markets; summarizes fixed income conditions; provides fund and model portfolio results through June 30, 2026; and offers our outlook for the second half of the year.
Canadian Equity Market
Canadian equities delivered another strong quarter, with the S&P/TSX Composite gaining 7%. That marked the index’s eighth straight quarterly advance, its longest winning streak since 1996. The recovery from the Iran-driven selloff was remarkably fast: the market recouped its roughly 9% drawdown in under 30 days and pushed on to new all-time highs by early June, closing the quarter near 34,857.
Leadership rotated meaningfully. After gold and energy carried the market in Q1, financials took the baton in Q2, supported by solid bank earnings and a steady rate environment. Industrials also performed well, helped by AI-related infrastructure spending and broader “build Canada” investment initiatives. On the other side, the materials sector faced headwinds as gold fell roughly 13% during the quarter, pulling back from its record highs as safe-haven demand faded. Energy was volatile: oil entered the quarter above $100 per barrel and ended near $70 as the conflict eased.
The economic backdrop remains the soft spot in the Canadian story. Q1 GDP contracted 0.1% on an annualized basis, the second consecutive quarter of negative growth, which meets the technical definition of a recession. That said, the details were more encouraging than the headline: household consumption held up, and early data pointed to a rebound beginning in April, with manufacturing sales reaching a record high in May. The Bank of Canada held its policy rate at 2.25% throughout the quarter, and we discuss the evolving rate outlook in the fixed income section below.
Looking ahead, the renegotiation of the Canada-U.S.-Mexico trade agreement (CUSMA), which began in July, is the key domestic risk to watch for Canadian markets in the second half of the year.
US Equity Markets
U.S. equities delivered a historic quarter. The S&P 500 gained 15%, its strongest quarter since the pandemic rebound of 2020, while the Nasdaq surged over 21%, one of its best quarterly showings in 25 years. In Canadian dollar terms, an unhedged S&P 500 position returned roughly 17%, as currency movements added to gains.
The rally was powered by a potent combination: relief that the Iran conflict was moving toward resolution, exceptional corporate earnings, and renewed confidence in the AI investment cycle. The concerns that drove Q1’s selloff, gave way to a focus on the enormous AI related capital spending underway. The largest technology companies are now on track to invest nearly $700 billion in capital expenditures in 2026, a wave of investment that is lifting semiconductor companies, industrial suppliers, and energy infrastructure alike.
Earnings were the foundation of the move. Expectations for Q2 earnings growth rose from 18.8% at the end of March to 23.1% by quarter-end, and analysts raised full-year estimates during the quarter. The rally in U.S. equities this quarter was driven more by improving fundamentals than by expanding valuations. The S&P 500 ended the quarter trading at roughly 20 times forward earnings, below where it started the year, because earnings grew faster than prices.
Just as encouraging was the breadth of the advance. Small-cap stocks, which had lagged for years, rebounded more than 26% from their April lows, and small-cap indices are now up over 20% for the year, outpacing large caps. Industrials are the top-performing sector year-to-date. By June, leadership had rotated toward value stocks, financials, healthcare, and cyclicals, exactly the kind of broadening we have been positioned for in the US markets and have highlighted in past commentaries.
We would note one caution: after a 15% quarter, sentiment has swung a long way from the pessimism of early April, and any disappointment in earnings from the largest technology companies or loss of confidence in the AI capital expenditure super cycle could reintroduce volatility quickly.
International & Emerging Markets
International markets participated fully in the global rally, and in some cases led it. Developed international equities gained roughly 10% in the quarter, while emerging markets surged approximately 24%, the standout performance among major asset classes.
The emerging market story was concentrated in Asia. South Korea and Taiwan, home to the semiconductor manufacturers at the heart of the AI buildout, were among the top-performing markets globally as chip demand and pricing soared. China and India, by contrast, lagged significantly, creating one of the widest geographic performance gaps in recent memory.
This concentration carries a lesson worth stating plainly: some of the international outperformance this quarter came from the same AI theme driving U.S. markets, rather than from truly independent sources of return. Geographic diversification remains valuable, but we are mindful that portfolios can appear diversified by geography while still being exposed to a single dominant investment theme. This is a consideration we actively manage in our geographic and sector allocations.
In Europe, returns were positive but more modest, supported by easing inflation and continued defence and infrastructure spending. Japan continued to benefit from corporate reforms and a supportive currency backdrop for its exporters.
We remain slightly overweight in international markets. Valuations outside North America remain more reasonable, and the broadening of global growth beyond the U.S. supports the case for maintaining meaningful exposure abroad.
Fixed Income Market Summary
The defining fixed income story of the quarter was not returns, which were modest, but the sharp change in the interest rate outlook.
In a span of six months, market expectations in the U.S. have swung from pricing in two rate cuts, to no cuts, to now anticipating potential rate hikes by the end of 2026. Two forces drove this reversal. First, inflation has proven sticky, with the energy price spike from the Iran conflict feeding through to consumer prices. Second, leadership changed at the Federal Reserve: Kevin Warsh was confirmed as Fed Chair in May and immediately struck a more hawkish tone, refocusing the central bank squarely on its 2% inflation target. U.S. bond yields rose in response, with the 10-year Treasury climbing to roughly 4.5% by quarter-end.
Canada told a different story. The Bank of Canada held its policy rate at 2.25% throughout the quarter, and Canadian bond yields actually declined modestly, with the 10-year Government of Canada yield easing to around 3.4%. The divergence reflects the two economies’ different situations: the U.S. is running hot with resilient growth and sticky inflation, while Canada’s economy is technically in recession. Market pricing has shifted to imply the Bank of Canada’s next move will be a hike rather than a cut, though most bank economists expect the Bank to remain on hold through the end of 2026 given the weak growth backdrop.
Bond returns were positive this quarter, and notably, Canadian bonds outperformed their U.S. counterparts. The Canadian Bond Universe (XBB) gained 2.08%, well ahead of the broad U.S. bond market’s roughly 0.7% return, as Canadian yields declined modestly while U.S. yields rose on the shifting rate outlook. Higher-yielding U.S. corporate bonds also performed well, returning around 2% as the improving economic outlook supported credit markets. With credit spreads near historically tight levels in both countries, investors simply are not being paid much extra to take on corporate credit risk. Our positioning preference toward government bonds and shorter maturities remains unchanged for this reason.
The larger takeaway for fixed income investors: with rate cuts off the table for now, today’s yields are likely to persist, supporting the income-generating role bonds play in our client portfolios.
Raintree Fund Performance
All four Raintree Funds posted positive returns in Q2, led by Core Equity as markets staged a powerful recovery from the first quarter’s selloff. The quarter rewarded the discipline of staying invested: every fund that was tested by March’s volatility participated in the rebound that followed, and all four funds are positive for the year. Results through June 30, 2026 are shown below.
Raintree Funds – Returns (as of June 30, 2026)
Reference Indices – Returns (as of June 30, 2026)
Key Takeaways:
Core Equity returned 10.27% in Q2, bringing its year-to-date return to 11.60%. The fund outperformed Canadian equities for the quarter while trailing the exceptional returns of U.S. and global markets, a reflection of our diversified positioning in the narrow group of AI-driven names that led the global rally. Over the trailing year, the fund has returned 26.22%.
Core Fixed Income gained 2.38% in Q2, ahead of the Canadian Bond Universe (XBB) at 2.08%. Over the trailing year, the fund has returned 6.20% against the benchmark’s 3.26% reflecting the value of active positioning through a volatile rate environment.
Enhanced Yield returned 3.33% for the quarter, as the equity-exposed portion of the portfolio that weighed on Q1 results rebounded alongside markets. The fund continued to deliver on its core mandate of consistent yield generation, returning 9.28% over the trailing year.
Alternative Strategies returned 0.67% in Q2, a modest result in a strongly rising market. Our overweight to hedge funds and market-neutral strategies delivered steady but muted returns, consistent with their low-beta design, while several of our real asset positions carry valuation marks that have not yet been updated to reflect the quarter. Over the past year the fund has returned 7.19%, continuing to fulfill its role as a diversifying, less correlated return stream.
Model Performance
Model portfolio performance was strongly positive across all mandates in Q2, with returns rising with equity allocations.
The rebound rewarded investors who stayed the course through the first quarter’s volatility: every model across every risk tier is positive for the year.
Q2 Performance by Model
Since Inception Annualized Performance by Model
Within each risk tier, results followed a consistent pattern. Flex+ models led, reflecting their higher allocation to Core Equity (+10.27% in the quarter). Explore+ and Core+ models posted solid results with less dispersion, as their allocations to Alternative Strategies provided absolute returns. Income+ delivered steady gains consistent with its capital preservation and income mandate.
The models are working as intended: the more diversified models provided better protection in Q1, while the higher equity allocation models captured more of Q2’s upside. Since inception, we believe all models have delivered strong results within each risk profile.
Second Half 2026 Outlook:
The Themes That Matter
Markets enter the second half of 2026 with more momentum than they entered the second quarter. But the rapid recovery has also raised the bar: sentiment is optimistic, valuations reflect an optimistic outlook, and several important dynamics are shifting beneath the surface. Below we discuss four themes we believe will shape markets, and portfolios, through the balance of the year.
The rate environment has changed
Perhaps the most significant shift of 2026 has gone somewhat under-appreciated amid the equity rally: in just six months, U.S. interest rate expectations have swung from two cuts, to none, to potential hikes. New Federal Reserve leadership has taken a notably harder line on inflation, and bond markets have repriced accordingly. For investors, this cuts two ways. Higher-for-longer rates mean cash and bonds continue to offer attractive income, a genuine benefit for the conservative side of portfolios. But rising rates may also pressure equity valuations, particularly for the growth stocks that led the second-quarter rally. Canada sits in a different position: with the domestic economy in a technical recession, the Bank of Canada is more likely to stay on hold than to follow the U.S. higher.
The AI buildout is broadening, and so is its reach
The nearly $700 billion that major technology companies plan to invest in AI infrastructure this year is flowing well beyond the technology sector, lifting industrials, energy infrastructure, utilities, and the semiconductor supply chains of Asia. This spending is a genuine, multi-year economic tailwind, and it helps explain why earnings keep beating expectations. But its reach is also becoming a source of concentration risk. When the same investment theme drives U.S. technology stocks and emerging equity markets simultaneously, portfolios can look diversified on paper while depending heavily on a single narrative. Any disappointment in AI-related spending or earnings could ripple across markets that would traditionally be considered diversified.
Geopolitics: better, but fragile
The June memorandum of understanding between the U.S. and Iran was the turning point of the quarter, and oil’s return to roughly $70 per barrel has removed a significant tax on consumers and businesses. Markets, however, are now largely priced for peace. The late-June exchanges of fire were a reminder that the agreement remains fragile, and a breakdown would reintroduce the energy shock dynamics of the first quarter to a market with less cushion for disappointment. We are not positioned for a specific geopolitical outcome; rather, we hold diversifying assets that tend to mitigate risk and volatility.
Canada at a crossroads
The Canadian market has now risen for eight consecutive quarters even as the domestic economy has contracted in three of the past four. That gap between market performance and economic performance can persist, corporate earnings and commodity prices matter more to the TSX than domestic GDP, but the second half brings a genuine test: the renegotiation of the CUSMA trade agreement, which began in July. The outcome will shape the environment for Canadian exporters, business investment, and markets. A constructive resolution would be a positive development for Canadian business while an adverse outcome is a clearly identifiable domestic risk on the horizon.
Our Positioning
Core Equity: We remain moderately underweight the U.S. and moderately overweight global and emerging markets, where valuations are more reasonable and the broadening of global growth supports the case for exposure abroad. Within our U.S. allocation, we are incrementally shifting toward quality businesses with long track records of consistent earnings and dividend growth, while modestly reducing our exposure to AI-related names. We also continue to see value in small caps, which have begun to be rewarded as market leadership widens beyond the largest technology names.
Core Fixed Income: Our preference remains short duration and government bonds. With credit spreads near historically tight levels and the inflation outlook still uncertain, we do not believe investors are being adequately compensated for taking on additional credit or interest rate risk.
Enhanced Yield: We maintain keeping broad diversification across underlying themes, however, for similar reasons expressed in the Core Fixed Income fund, we are more selective where credit spreads are tight. We added Dynamic Funds to the liquid sleeve during the quarter, further supporting the fund’s liquidity and mandate of consistent yield generation.
Alternative Strategies: We remain overweight market-neutral strategies while continuing to evaluate compelling private market opportunities. In a more sticky inflationary environment, we favour real assets and certain real estate asset classes. During the quarter we added an allocation to Blackstone’s infrastructure strategy, with return contributions expected to be reflected beginning next quarter.
Final Thoughts
The first half of 2026 saw markets fall sharply on a geopolitical shock, then recover to new highs within a matter of weeks. Investors who stayed the course were rewarded, while those who reacted to headlines risked missing the swift, V-shaped rebound in equity markets. It was a clear reminder that time in the market beats timing the market.
In the current environment, we continue to believe that well-constructed portfolios provide the soundest approach to an uncertain outlook. For us, that means globally diversified equities with meaningful exposure beyond the dominant AI theme, complemented by income-generating assets and real assets that help mitigate volatility and inflation. No single component is likely to lead in every quarter, but together they are built to compound steadily across a range of market conditions over the long-term.
If you have any questions about this commentary or your portfolio, please don’t hesitate to contact your advisor or our team. We’re here to help, and we appreciate your trust in Raintree Wealth Management.