July 07, 2026

Markets overview

The second quarter was exceptionally strong for equities. Markets recovered from the March selloff and volatility tied to the Iran conflict. While geopolitical risk remained elevated, escalation fears eased and investors refocused on resilient earnings and the artificial intelligence (AI) theme. Year-to-date, returns have improved across regions and market segments. Emerging markets and global small-cap companies outperformed, but equity leadership remained concentrated in AI companies.

Within AI, the largest AI companies are spending at extraordinary levels to build the infrastructure needed to support future growth. Market leadership shifted toward the companies enabling that buildout, including semiconductor, equipment and infrastructure providers, as real dollars are being spent today. The key question is whether the companies funding this investment will ultimately earn attractive returns on the money they are spending.

Canadian equities also delivered strong returns, but for different reasons. Canada has less direct exposure to the AI theme, so returns were driven more by strength in financials. Banks were the key contributors, supported by strong revenue from capital markets, expanding margins, and improving investor sentiment.

Market fundamentals remained solid, with corporate earnings growth continuing to provide support across global markets. Earnings strength was not limited to AI-related companies. It was also supported by solid nominal global growth, ongoing fiscal spending, and continued business and consumer demand. This earnings strength helped offset uncertainty around inflation, interest rates, and the potential slowdown in economic growth.

Returns for traditional bonds were solid in the second quarter after a flat first quarter. However, bonds remained sensitive to sticky inflation and shifting expectations for interest rate cuts — the same forces that have increasingly influenced equity market volatility this year.

Portfolio strategy and positioning

Our view remains constructive, but more cautious. Company earnings and economic growth continue to support equities. And AI investment and fiscal spending remain important tailwinds. However, market returns have been exceptional for several years, and leadership remains concentrated around a narrow set of powerful themes. This increases the importance of disciplined portfolio construction. Portfolios should participate in growth without becoming dependent on one theme or one interest-rate outcome.

Within equities, we continue to seek exposure to structural growth themes such as AI, but with greater focus on durability. The opportunity has expanded from the largest AI companies into memory, power and equipment. The next question is which companies can convert AI investment into durable earnings growth and attractive returns on capital. We maintain exposure to markets with different return drivers, including Canadian equities, where materials, financials, energy and infrastructure are important contributors.

In fixed income, we reduced portfolio sensitivity to a potential rise in bond yields. Bonds still have a role in portfolios, but sticky inflation and shifting expectations for rate cuts have made traditional core bonds more vulnerable. We continue to favour income-oriented and credit strategies, where yields remain attractive and fundamentals are generally healthy.

At the total portfolio level, strong equity gains lifted allocations above target, leading us to reduce equity exposure closer to neutral as inflation risks rose and central bank support became less certain. Portfolios retain enough equity exposure to benefit if earnings stay strong and markets continue to advance.

We see the clearest diversification benefit today in strategies outside of traditional stocks and bonds. Market-neutral hedge strategies can help smooth returns by relying less on broad market direction, while real assets such as private infrastructure increase exposure to durable cash flows hedged to inflation. These exposures are designed to give portfolios additional ways to earn returns if market leadership changes or the inflation and interest rate backdrop remains unsettled.

Overall, the market backdrop remains supportive, but less straightforward. Strong earnings argue against being defensive, while inflation uncertainty, geopolitics, high AI expectations, and less predictable central bank support argue against simply chasing what has already worked. Our positioning is designed to participate in opportunities across several potential outcomes.

This material, including any attachments, is provided for informational purposes only and is not intended as investment, legal, accounting, or tax advice. It has been prepared without regard to individual financial circumstances or objectives, and readers should consult independent professionals, as applicable. All views, opinions, estimates and projections contained in this material constitute Connor, Clark & Lunn Private Capital Ltd. (“CC&L Private Capital”)’s judgment as of the date of publication and are subject to change without notice. Certain information contained herein is based on information obtained from third-party sources that CC&L Private Capital considers to be reliable. Past performance is not indicative of future results, future returns are not guaranteed, and loss of capital may occur. This material is intended for the use of the recipient only and no matter contained herein may be separately used, disseminated, distributed, reproduced or copied by any means, in whole or in part without express prior written of CC&L Private Capital. This is not an offer to sell or a solicitation to buy any securities and should not be construed as a sales communication.