Trade tensions marked 2025, as many countries accepted that tariffs would be imposed on their exports to the US. Economic growth was higher in the US than in Canada and other developed countries, yet Canadian, international, and emerging-market stocks outperformed by a wide margin.[1]

The Global Economy

US GDP grew at a moderate 2.3% pace, while Canada (0.4%) and Japan (0.6%) were nearly stagnant. The EU (1.4%) and the UK (1.3%) also saw lacklustre performance. China’s GDP grew by 4.8%, which is modest by the standards of this emerging economy.

Inflation is under control in Canada (2.2%), the EU (2.1%), and China (0.7%). However, it is higher in the US (2.7%), Japan (2.9%), and the UK (3.8%). So far, the US tariff war has not led to significantly higher inflation, but the policy has not yet had its full effect.

Apart from Japan (2.6%), the US (4.3%) has the lowest unemployment rate among major economies. Canada (6.5%) and the EU (6.4%) have similar jobless rates, while the UK (4.8%) and China (5.1%) are in the middle of the group.

North American Interest Rates

To counter the softening economy, the Bank of Canada reduced its policy rate from 3.25% to 2.25% in 2025. The US Federal Reserve cut its Target Federal Funds Rate from 4.50% to 3.75%. Canadian bonds showed little reaction to the Bank of Canada rate cuts, with 5-year government of Canada bond yields staying virtually the same (2.94%), and the 10-year bond yields increasing from 3.23% to 3.42%. 10-year US Treasury bond yields were more in sync with the Federal Reserve rate cuts, declining from 4.58% to 4.18%.

2025 Asset Class Returns

(all data in Canadian dollars unless otherwise mentioned)

Short-term and total-market Canadian fixed-income indices produced 3.9% and 2.6% returns, respectively.
Short-term and total-market global fixed-income securities (hedged to the Canadian dollar) produced 3.3% and 3.1% returns.
Canadian equity delivered a whopping 31.7% return.
US stocks returned 11.9% in Canadian dollars and 17.2% in US dollars.
International developed-market stocks returned 25.3% in Canadian dollars and 20.6% in local currencies.
Emerging-market equity returned 28.3% in Canadian dollars.
Large-cap stocks outperformed their small-cap counterparts in the US and emerging markets. Small-cap stocks outperformed in Canada. International developed large- and small-cap stocks produced similar returns.
Growth stocks outperformed value stocks in the US, while the inverse held in the Canadian and international developed markets. Emerging markets’ value and growth stocks performed similarly.
The US dollar depreciated by 5% against the Canadian dollar. This depreciation has reduced US stock returns measured in Canadian dollars. By contrast, other developed-market currencies have appreciated against the loonie, adding almost 5% to international stock returns in Canadian dollars.

2026 Outlook: Uncertainty vs. Risk

A major concern among investors is the high valuations of stocks. This is not new: the US stock market’s cyclically adjusted price-to-earnings ratio has been near its historical high for many years. This did not prevent global stocks from delivering double-digit returns in the last three years. What will happen to stock prices in 2026? No one knows what the future holds, but what is certain is that political and economic uncertainty will continue.

Uncertainty is, by definition, elusive: it can’t be measured, and the possible outcomes are unknown. By contrast, risk is measurable. PWL builds all-weather portfolios rather than trying to outsmart the market. Our approach to portfolio management is to transform chaotic uncertainty into orderly risk.

This transformation process, called diversification, is implemented at four levels. Firstly, portfolios are constructed with stocks and bonds to maximize long-term returns while controlling volatility. Secondly, stock holdings are globally diversified to mitigate country-specific risk. Thirdly, portfolios are diversified across all sectors of the stock market. Finally, portfolios hold over 14,000 stocks, ensuring that the failure of one or a handful of stocks—even the largest—does not permanently damage long-term performance.

Therefore, our priority for 2026, as always, remains to act on what we can control: mitigating risk through diversification, investing in high-quality, low-fee products, and managing taxes efficiently.

[1] Sources: DFA, Bank of Canada, Statistics Canada, US Federal Reserve, US Bureau of Labor, US Department of Commerce, Eurostat, Trading Economics.