Markets in 2026: pessimism or potential?

Equity Market Outlook for 2026: A Recap of 2025 & Investment Opportunities

Key Concepts:

• TSX: Toronto Stock Exchange, a major Canadian stock market index.
• S&P 500: Standard & Poor's 500, a US stock market index representing 500 large-cap companies.
• Tarrif Fatigue: Investor acclimation to ongoing tariff-related news, diminishing its impact on investment decisions.
• Kuzma (USMCA): The Canada-United States-Mexico Agreement, replacing NAFTA.
• Valuation: The process of determining the economic worth of an asset or company.
• Free Cash Flow Margin: A financial ratio indicating a company’s ability to generate cash.
• Maximum Pessimism: The point at which negative sentiment surrounding an asset is at its highest, potentially presenting a buying opportunity.
• AI (Artificial Intelligence): The simulation of human intelligence processes by computer systems.
• Large Language Models (LLMs): Advanced AI models capable of understanding and generating human language.

I. 2025 Equity Market Performance – A Year of Surprises

The year 2025 proved to be exceptionally strong for equity investors globally, particularly in Canada. Despite initial anxieties, the TSX experienced a year-to-date increase of approximately 30%, while the S&P 500 rose over 15%. This positive performance occurred amidst significant market noise, including concerns surrounding tariffs and trade talks. Martin Cobb noted a specific instance of initial investor fear in January, highlighting the unexpected market rally.

II. Looking Ahead to 2026: Forecasts and Caution

Predicting market performance in 2026 is inherently uncertain. Cobb emphasized the limitations of forecasting, referencing Warren Buffett’s observation that forecasts reveal more about the forecaster than the future itself. While acknowledging incoming expectations, he cautioned against relying heavily on them. A key observation is that market performance, which had been concentrated in specific areas, showed tentative signs of broadening out.

III. The Impact of Tariff Fatigue & Shifting Valuations

A significant development in 2025 was “tariff fatigue,” where investors became desensitized to ongoing tariff-related news. This suggests that the market adapted to the uncertainty, continuing to operate and invest despite the trade tensions. Cobb pointed out that regardless of future tariff developments, the market has largely adjusted.

However, valuations in both Canada and the US are now considered “fairly expensive” at an aggregate level. While short-term market performance often disregards valuations, Cobb believes it is becoming more challenging to identify attractively valued, high-quality businesses.

IV. Lessons Learned & The Importance of Perspective

Cobb discussed the tendency for investors to learn lessons in the short term but then forget them over time. He highlighted the continued relevance of the new NAFTA (KUSMA), with renegotiations expected in July. He also noted the potential impact of affordability concerns in the US, citing the delay of planned tariffs on furniture and cabinetry as a possible indication of this influence. He posited that tariffs ultimately represent a tax on the US consumer, impacting trading partners but primarily affecting American households. The upcoming midterm elections could also contribute to a calming of trade tensions.

V. Identifying Opportunities in Pessimism

Cobb advocates for seeking investment opportunities in areas experiencing “pockets of pessimism” or apathy. Drawing on the philosophy of John Templeton, he believes the best time to buy is at the point of maximum pessimism, when negative sentiment is at its peak. He emphasized the importance of looking beyond popular trends, such as AI, to identify undervalued businesses in overlooked sectors or geographies. He noted the strong performance of non-US stocks in the previous year, a trend that had not been seen for several years.

VI. Stock Picks for 2026: Adobe & Tektronix

Cobb presented two stock picks for 2026, based on his valuation-focused approach:

• Adobe (ADBE): Despite a prevailing narrative that AI will disrupt the software industry, Cobb believes Adobe remains a strong business. He pointed to the continued growth of its Creative Cloud subscriptions (over 10,000 new subscribers daily) and consistent revenue growth of around 10%, alongside high free cash flow margins. He argued that Adobe is currently trading at approximately 15 times earnings, significantly below its historical average of over 30 times, presenting a compelling risk-reward ratio. He contrasted the narrative around LLMs impacting Alphabet with the resilience of Adobe’s business model.
• Tektronix (Milwaukee & Ryobi): This company, owning Milwaukee and Ryobi power tools, is a market leader that experienced a slowdown following the pandemic-driven surge in demand. However, Cobb noted that Tektronix is now experiencing high single-digit to nearly double-digit revenue growth, with even stronger earnings per share growth. Like Adobe, it trades at a valuation of around 15 times earnings, which Cobb considers attractive given its market leadership and long-term growth potential.

VII. Political and Economic Considerations

The upcoming US midterm elections and the potential for a shift in political priorities were highlighted as factors that could influence trade policy and market sentiment. The growing concern over the cost of living in the US and the resulting pressure on policymakers to address affordability issues were also identified as potential catalysts for a more moderate approach to tariffs.

Conclusion:

The outlook for 2026 is characterized by cautious optimism. While acknowledging the challenges of forecasting, Martin Cobb emphasized the importance of focusing on valuation, identifying opportunities in overlooked areas, and remaining adaptable to changing market conditions. His stock picks, Adobe and Tektronix, reflect a strategy of investing in high-quality businesses trading at attractive valuations, despite prevailing negative narratives. The key takeaway is to look beyond the noise and focus on fundamental business performance and long-term growth potential.