The current economic landscape is defined by a paradoxical split where the experience of the average consumer stands in stark contrast to the exuberant heights of equity markets. Indeed, major stock market indices have recently climbed to all-time highs, while consumer sentiment remains mired in a state of malaise. We think the recent divergence of these barometers has more to do with factors depressing consumer sentiment than concerns about a bubble in equity markets.

In Canada, the weekly Bloomberg Nanos survey of consumer confidence sits at 50.3 (as of January 30, 2026), barely above the 50 level demarcating positive and negative outlook. More astonishing is the deterioration in the U.S. where the widely followed University of Michigan Consumer Sentiment Index is near a 40-year low, well below the April 2020 pandemic low and on par with levels recorded during the Great Financial Crisis of 2008-2009 (data from Bloomberg). With consumer spending contributing the largest share of gross domestic product (GDP) (55% in Canada, 67% in the U.S. according to CEIC data), consumer sentiment, GDP growth, and equity markets are normally correlated.

In many regions, including Canada, the cost-of-living crisis, ongoing trade uncertainty, geopolitical tension, and artificial intelligence (AI)-induced job insecurity may be contributing to poor consumer sentiment. Normally, these sentiments would translate into weaker economic conditions, stagnant corporate profits, and a sluggish equity market. While consumer sentiment may be depressed, broad economic indicators are not flashing red. In fact, they are mostly in line with long-term averages: (data below is from Bloomberg).

• Canadian and U.S. unemployment rates have drifted higher than pre-pandemic levels but are still below their respective 20-year averages (Canada currently at 6.5% vs. 20-year average of 6.9%, U.S. at 4.4% vs. 20-year average of 5.8%).
• Inflation in both countries has been decelerating from pandemic peaks and is now in line with the long-term average (Canadian CPI currently at 2.4% vs. 20-year average of 2.2%, U.S. CPI at 2.7% vs. 20-year average of 2.6%).
• Consensus GDP growth of 1.7% in 2025 and 1.2% in 2026 for Canada are sub-par relative to the 20-year average of 2.0% but not signalling recession. U.S. consensus GDP growth of 2.2% in 2025 and 2.6% in 2026 are on par with the 20-year average of 2.2%.
• Year-over-year corporate earnings growth for the companies comprising the S&P500 are expected to grow 12.2% for 2025 and 12.6% in 2026, while S&P/TSX Composite Index earnings are expected to grow 9.3% in 2025 and 15.8% in 2026.

Could politics and heightened uncertainty be preying on consumer confidence?

A closer look at another consumer confidence survey may partly explain the divergence in how consumers are feeling and actual economic conditions. In the January 2026 edition of The Conference Board’s survey of U.S. consumers, the multi-year low reading in confidence had a distinct political tilt. Confidence among consumers identifying as Democrats deteriorated 28% from December 2024, while confidence among Republican-leaning respondents declined only 6%. As investors, knowing that consumer confidence has been contaminated by partisan politics rather than strictly economic factors provides comfort to our constructive market outlook for 2026.

Uncertainty resulting from rapid change may also help explain increased consumer and investor anxiety. At a speech we attended last week, Bank of Canada Governor Tiff Macklem outlined three structural shifts driving uncertainty for consumers and businesses alike:

• Repositioning of the world order has implications on military alliances and global trade.
• AI could disrupt segments of the economy and job market.
• Demographic momentum is shifting as the population ages and immigration is curtailed, leading to slower labour force growth.

Despite the downside risks of these structural changes the Bank of Canada forecasts GDP growth that is consistent to private sector consensus, a stable to declining unemployment rate, and inflation remaining near its 2% target. Reading between the lines of this forecast suggests to us that the Canadian economy is not expected to stumble from the structural changes it faces.

Leadership transitioning from Magnificent-7 to broader market

While investor interest in AI was manifested through a narrow cohort of mega-cap technology firms in recent years, the market has been undergoing structural rotation since late 2025. Specifically, the index of Magnificent-7 stocks has declined 4.5% since the end of October through February 6, 2026, while the S&P500 Equal Weight Index has gained 7.6% on a price-only basis (in USD, according to Bloomberg). We don’t interpret this as a retreat from AI but rather its diffusion across the broader market where traditional sectors like financials, industrials, healthcare, and staples are beginning to capture the productivity and margin-enhancing benefits of AI.

Similarly, outperformance of small-cap stocks since October serves as a market signal indicating that investors are looking past current doldrums toward an improved economic outlook. This broadening of market participation suggests the underlying foundation of the market is strengthening, anticipating a more democratic distribution of growth ahead.

With valuation across most indices hovering above 10-year averages, we continue to expect 2026 equity returns will come mostly from earnings growth as valuation multiples have little room to expand further. The combination of fiscal and monetary stimulus, stable economic conditions, and favourable earnings outlook supports our modest overweight equity positioning. We remain diversified across sectors and regions and have sufficient fixed income and market neutral strategies within portfolios to serve as volatility dampeners.

As always, we encourage you to contact us if you have any questions regarding your portfolio and our market outlook.