Past performance no guarantee of future results

Market rotation is already underway

This year’s FIFA World Cup has given us the reminder that few things in life are guaranteed. Former champions of the beautiful game are out, including Brazil, Germany, and Uruguay. Reigning champion Argentina was taken to extra time by the smallest remaining country, Cape Verde. Just like investing, past performance in soccer does not guarantee future results.

We’re also reminded that one of the most enduring clichés in sport is that soccer is a game of two halves, as demonstrated when Canada played Morocco. The Canadian side dominated the first half but failed to score. Morocco controlled the second half and won the match 3-0.

In the same way, the performance of financial markets in the first half of 2026 offers no guarantees for the rest of the year. With major North American indexes up over 10% so far year-to-date, ranging from Nasdaq’s 17% increase driven by the Magnificent 7, through the S&P/TSX 60’s 11% gain and the S&P 500’s 10% advance, North America has continued to outperform most other developed markets.

Accordingly, the Bank of Canada and the U.S. Federal Reserve have kept short-term interest rates unchanged at 2.25% and 3.5%-3.75% respectively, while the European Central Bank (ECB) has had to raise its short-term borrowing rate to 2.25%, attributable to higher inflation caused by the sharp rise in energy costs due to the U.S.-Iran war.

Uninspiring bond markets

Rising interest rates, or the threat of them, has meant that bond markets have been uninspired, with the return from the iShares Core Canadian Universe Bond Index ETF (TSX: XBB ) (and its U.S. equivalent) flat year-to-date. The new Fed Chair Kevin Warsh, who took over from Jerome Powell in May, surprised markets by sounding more hawkish than expected from an appointee of President Trump, who has made his desire for lower rates clear.

Mr. Warsh, who was a Fed governor during the Financial Crisis in 2007-09, is on record as wanting to make fewer comments on monetary policy, and to reduce the role of the central bank in giving guidance to markets. As a result, investors’ expectations have swung wildly this year, from anticipating three 0.25 percentage point interest rate hikes by the Fed in March when the outbreak of the Iran war led to the price of a barrel of oil exceeding US$120, fueling inflation, to less than a 50% chance of one increase at the time of writing.

Oil’s decline to below US$70 a barrel has undoubtedly contributed to waning fears of inflation becoming embedded, meaning that unlike their mistake in 2021-22, central banks are correct to believe that higher prices are genuinely transitory this time around.

However, a lower possibility of rising interest rates still leaves U.S. equities vulnerable to disappointment if earnings growth for the AI hyperscalers (Amazon, Alphabet, Meta, and Microsoft), and their microchip suppliers (NVIDIA, Micron, Intel, Broadcom, TSMC, Samsung Electronics, and SK Hynix) fails to meet high expectations. Samsung, the largest Korean chipmaker, saw its shares fall 7% the day after its excellent earnings were felt to be not as strong as some investors had wanted. Over the last month, Nvidia and Broadcom are off 4.7% and 3% and Microsoft is off 7%.

Elon Musk’s Space Exploration Technologies Corp. (NSD: SPCX), having risen almost 50% from its $150 IPO price, is now to $108.27, but it still sells for roughly 100 times revenue. Ironically, Apple Inc. (NSD: AAPL), which has had to raise the price of its iPads and iPhones by $100 due the higher chip prices, is up 15% year-to-date, as opposed to Microsoft, Meta, and Tesla, down 20%, 9% and 6%, respectively.

Where the performance is and is not

Sectors that have done well in the first half include energy. The iShares S&P/TSX Capped Energy ETF (TSX: XEG) is up 24% as almost all major Canadian energy companies become profitable when oil remains above US$40 a barrel.

Interest rate sensitive sectors have also done well, with the iShares S&P/TSX Capped Financials Index ETF (TSX: XFN), iShares S&P/TSX Capped Utilities Index ETF (TSX: XUT), and the iShares S&P/TSX Capped REIT Index ETF (TSX: XRE) up 22.4%, 14.8%, and 12.6%, respectively, before taking dividends into account. This indicates that investors are discounting any worries over rising interest rates.

Emerging markets have traditionally been the worst affected by higher energy prices, as they are generally oil importers, and their commodity exports are expected to be hit by slower growth due to higher energy costs. But once again, we are reminded that few things in life, or investments, are guaranteed. They have been the best performer this year, with the iShares MSCI Emerging Markets ETF (NYSE: EEM) up 23.5%.

A large part of this outperformance is due to Taiwan and South Korea and their microchip giants forming the largest weight in the emerging market index. Nonetheless, the remaining countries have held up better than expected, with demand for metals and minerals and cheaper consumer products in a cost-of-living environment proving resilient.

Gold has been the worst-performing asset class in the first half, with the SPDR Gold Shares (NYSE: GLD) off 3.6% and the iShares S&P/TSX Global Gold Index ETF (TSX: XGD) off 3.1%. Gold peaked at US$5,500 per oz. in January before falling 30% to under $4,000 an oz. However, over one year, gold is still up 24%, and the gold mining ETF is up a remarkable 57%, almost double the return of the Nasdaq and the MSCI World Index.

Central banks have continued to increase the percentage of their reserves in gold, especially as there were concerns over the strength of the U.S. dollar due to continued high budget and trade deficits. Instead, the U.S. dollar has strengthened. The U.S. position as an oil and gas exporter has only been reinforced by the disruption to supply caused by the Iran war. The same is also true for Canada but has been insufficient to strengthen our loonie.

As the market turns

In summary, it seems that a rotation is underway out of the sectors and themes which have dominated performance for the last three years, particularly the Magnificent 7 mega cap technology stocks. It may turn out that, in terms of market concentration and absolute performance, the peak was reached in the fourth quarter of 2025.

The U.S. equity market is at one of three most expensive valuations in the last century. By any measure, whether Warren Buffett’s market capitalization as percentage of GDP, the Shiller 10 year cyclically adjusted price/earnings (CAPE) ratio, or such indicators of excessive investor sentiment as margin debt and the explosion of leveraged ETFs, we haven’t seen such expensive markets since 1929 and 2000. While not necessarily predicting a major fall, annual returns from markets at these levels of valuation have been very poor, averaging 1%-3% p.a. over the next decade, as seen after the dotcom bubble in 2000.

Investors can earn better returns by rotating into more attractively valued sectors. Small caps, value stocks, and emerging markets all offer better yields. Just buying stocks with a reasonable dividend, in the 2%-4% range, would produce a return equal to what’s likely from buying the U.S. indexes, and with much less volatility.

Canadian investors are fortunate that the S&P/TSX, with its high exposure to financials, energy, and materials, is well positioned for times of lower growth and higher uncertainty. Similar to the tumultuous decades of the 1970s and the 2000s, it will probably end up outperforming both the S&P 500 and Nasdaq. The S&P/TSX 60 has matched the return from the S&P 500 (72% vs. 74% before dividends) in local currency terms and is not far behind Nasdaq (102%). Of course, the weakness of the Canadian dollar has added to the returns from U..S markets, but stronger energy and commodity prices may, as they did in the 1970s and 2000s, once again lead the loonie to trade at parity with the greenback.

Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management. He is currently Chief Investment Officer of Calgary-based Spire Wealth Management.

Notes and Disclaimer

Content copyright © 2026 by Gavin Graham. Excerpted from an article that first appeared in The Internet Wealth Builder newsletter. Used with permission.

The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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