Throughout the second half of 2026 we’ll be reintroducing the investment strategies that we manage here at Matco, along with their lead portfolio managers. Before we get to our first interview, a quick recap on July's market developments. Now, if you only looked at July's headline market returns, you might think very little happened. But beneath the surface, much more was taking place.
Here are the three things investors should truly take away from the month. Market leadership broadened beyond just technology. Geopolitical and trade risks pushed energy prices and bond yields higher, and the Canadian and US economies began moving in noticeably different directions. First, global equities were largely unchanged, with the S&P 500 slipping slightly. But under the hood there was a meaningful rotation.
Energy gained more than 12%. Financials were also strong, while technology sold off and the Nasdaq 100 entered correction territory. Canadian equities benefited from this shift, outperforming on the strength of energy, banks, healthcare, and consumer staples. The weakness was particularly pronounced in semiconductors, which fell more than 20% from their late June high. Investors are beginning to question whether cheaper Chinese open source AI models could challenge the spending plans of hyperscalers and other AI beneficiaries, with valuations, elevated export controls creating additional risk, and public resistance to data center construction growing.
Investors are increasingly wanting to see a tangible return on all of that AI spending. Earnings themselves were strong, with roughly 85% of companies beating expectations. But simply beating estimates was no longer enough, particularly for the largest technology companies. Information technology and communication services still accounted for roughly three quarters of overall earnings growth, so market growth remains highly concentrated.
Geopolitics also returned to the foreground. Renewed tensions in Iran briefly pushed Brent Crude above $100 a barrel and WTI close to $90. Prices eased as the month progressed, but higher energy costs, stronger economic data and a more hawkish tone from central banks did push bond yields higher in both Canada and the United States. Markets are now confronting the possibility that rates will remain higher for longer, and may even need to move even higher again.
Trade uncertainty added another layer of noise. Washington announced a proposed 50% tariff on several Canadian products, including vehicles, alcohol, and dairy. It remains unclear whether the tariff will ultimately be implemented or withstand legal scrutiny, but for now, it looks like a negotiating tactic. But the potential on certain Canadian industries certainly shouldn't be dismissed. The Canadian economy, meanwhile, is in fact showing some encouraging signs.
GDP grew at a 2.5% annualized pace in the second quarter, and the labor market actually delivered another positive surprise in July. Employment increased by 75,000 in that month, while the unemployment rate actually edged down to 6.4%, its lowest level in two years. Combine that with moderating inflation, and this gives the Bank of Canada a little bit more room to be patient.
The picture in the US was much softer, at least in July. The economy grew at a 1.5% annualized pace in the second quarter, while payrolls unexpectedly declined by 23,000 in July. Previous months were also revised lower by a combined 103,000 jobs. The unemployment rate held steadily at 4.1%, but the underlying trend is clear. The labor market is in fact losing momentum.
That should make the Federal Reserve hesitant to raise rates into a slowing economy, particularly when AI related investment remains the primary engine of growth. As we touched on earlier, the bottom line overall is that the market is broadening, but not without risks. Energy and financials are benefiting as investors rotate away from expensive technology, while geopolitics and tariffs and higher bond yields are making the outlook a little bit less predictable.
As always, the key is to look past broad index level returns. Selectivity matters more than ever. That's where the real story lies and why it's so necessary to read between the lines.
