Bank of Canada expects Canadian economy to grow 1.1% in 2026

North American Market Analysis Following Central Bank Announcements - McKenzie Investments (Leslie Marks)

Key Concepts:

• Bank of Canada (BoC): Canada’s central bank, responsible for monetary policy.
• US Federal Reserve (The Fed): The central bank of the United States.
• KUSA (Canada-United States-Mexico Agreement): A free trade agreement governing trade between the three countries. Renegotiation is a key uncertainty.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.
• Powder Dry: A metaphor for maintaining financial flexibility to respond to unforeseen economic events.
• Value-Oriented Sectors: Investment in companies that appear undervalued by the market, often with stable earnings and dividends.
• Cyclical Sectors: Industries whose performance is closely tied to the economic cycle.
• Small Caps: Companies with relatively small market capitalization, often considered higher risk but with potential for higher growth.
• Free Cash Flow: A measure of a company’s financial performance, calculated as cash flow from operations minus capital expenditures.

I. Bank of Canada & US Federal Reserve Announcements & Market Reaction

The North American markets exhibited relative stability following announcements from both the Bank of Canada (BoC) and the US Federal Reserve. The lack of significant market reaction to the BoC announcement was largely attributed to widespread expectations of a “wait-and-see” approach. Leslie Marks, CIO at McKenzie Investments, explained that the BoC is currently assessing the impact of previous easing measures implemented in 2023, while acknowledging the “great uncertainty” surrounding the economic outlook for 2026. The BoC is intentionally maintaining “powder dry” – preserving its ability to cut rates if economic growth deteriorates further.

II. Key Uncertainties & Impact of KUSA Renegotiation

Marks identified the renegotiation of the KUSA trade agreement as a primary source of uncertainty for the Canadian economy. She emphasized that the outcome of these negotiations will be a major factor for investors to consider, as highlighted by Governor Mleham’s comments. The BoC’s monetary policy report indicated a significant downtick in economic growth expectations for Canada in 2024, falling to 1.1% compared to previous forecasts, even before factoring in potential changes stemming from KUSA renegotiations.

III. Canadian Economic Slowdown & Policy Impacts

The anticipated economic slowdown in Canada isn’t a surprise, according to Marks, as evidenced by recent jobs data. She noted that changes to immigration policy and federal government decisions will likely take several years to fully impact economic growth. Investment strategies are therefore focused on long-term growth, recognizing that immediate effects in 2026 are unlikely. Unemployment remains high, contributing to the cautious outlook.

IV. Market Broadening & Sector Rotation

A positive trend observed since late 2023 is the broadening of market participation beyond a narrow focus on AI-driven stocks. Marks described this as a “key tenant of our outlook for markets.” This broadening is characterized by increased strength in the materials sector, driven by rising gold, silver, and copper prices. There’s also a general shift towards value-oriented and cyclically driven sectors, creating a “much healthier place to be” for investors. Small-cap stocks are also participating in the market rally, further indicating a healthier equity market.

V. Big Tech Earnings & Shift in Investor Focus

While big tech companies were major market drivers in recent years, their momentum has stalled. Marks explained that the focus has shifted from topline revenue and earnings per share (EPS) to capital expenditure (capex). Previously, exceeding revenue targets was paramount; now, investors are scrutinizing how much these high cash flow companies are investing in capital projects and the expected return on those investments. The upcoming earnings reports from companies like Microsoft and Meta will be heavily focused on these capital expenditures. As Marks stated, “the focus now is very much on capex…and what the expected return is on that capital investment.”

VI. Data & Statistics Mentioned

• Canadian Economic Growth Forecast: 1.1% for 2024 (down from previous estimates).

Conclusion:

The current market environment is characterized by cautious optimism, with central banks adopting a “wait-and-see” approach amidst economic uncertainties. The renegotiation of KUSA poses a significant risk to the Canadian economy, while a broadening market participation and a shift in investor focus towards value and cyclical sectors offer positive signs. The performance of big tech companies will be closely watched, but the emphasis has shifted from revenue growth to capital expenditure and return on investment. Investors are advised to adopt a long-term perspective, recognizing that the full impact of current policies and negotiations will unfold over several years.