Morning Markets for Tuesday, May 26, 2026

Key Concepts

• AI Infrastructure: The physical and technical foundation (data centers, energy, GPUs) required to power AI models.
• Rule of 40: A venture capital metric where the sum of a company’s revenue growth rate and profit margin should exceed 40% to be considered highly investable.
• Wealth Effect: The economic theory that when asset values (stocks, real estate) rise, consumers feel wealthier and increase their spending.
• Insolvency: A state of financial distress where an individual or entity cannot meet debt obligations; a lagging indicator of economic health.
• Duration (Fixed Income): A measure of a bond's sensitivity to interest rate changes; extending duration is a strategy to benefit from potential rate cuts.
• Geopolitical Risk: The impact of international conflicts (e.g., Iran, Strait of Hormuz) on global supply chains, energy prices, and inflation.

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1. Economic Landscape and Market Trends

• Debt Levels: The Fraser Institute reports that Canada’s combined federal and provincial debt is expected to reach $2.4 trillion, equating to approximately 75% of the Canadian economy.
• Market Dichotomy: A significant disconnect exists between record-low consumer sentiment (University of Michigan/Conference Board surveys) and elevated investor optimism (nearly 60% expect higher stock prices).
• Growth Drivers: Experts attribute current market resilience to massive AI capital expenditure (the four "hyperscalers" investing ~$1 trillion), government fiscal spending, and the "wealth effect" benefiting higher-income demographics.
• Market Performance: While the TSX has faced recent pressure, U.S. indices (S&P 500, NASDAQ) have hovered near record highs, buoyed by hopes of geopolitical stabilization in the Middle East.

2. AI Investment Strategy

• The "Infrastructure" Play: Michael Monaghan (Founder ETFs) argues that the most profitable AI opportunities lie in the "boring" infrastructure—siting land, building data centers, and securing energy—rather than just the software models.
• Key Stocks:
  • Oracle: Positioned as a leader in AI infrastructure with a backlog that has quadrupled to over half a trillion dollars.
  • Palantir: Highlighted for exceptional performance, achieving a 145% "Rule of 40" score in the most recent quarter.
• Human-AI Synergy: Monaghan posits that AI will not replace humans but rather create a competitive divide: "It's a race of humans using AI against humans not using AI."

3. Fixed Income and Monetary Policy

• Interest Rate Outlook: Earl Davis (BMO Global Asset Management) expects interest rates to remain unchanged through the summer of 2026. He suggests that if inflation remains persistent through the fall, rate hikes could become a possibility in 2027.
• Treasury Strategy: Davis recommends extending duration in U.S. Treasuries, viewing them as oversold and a hedge against potential economic cooling if geopolitical tensions persist.
• Credit Markets: While overweight on corporate credit, Davis warns that valuations are currently very high, leaving little margin for error.

4. Corporate Developments: Eli Lilly

• Strategic Pivot: Eli Lilly is utilizing the "windfall" from its obesity drug success to acquire three early-stage vaccine companies for up to $3.8 billion.
• Diversification: The move targets infectious diseases (shingles, Epstein-Barr virus) to ensure the company does not become complacent, as it faces a competitive landscape in the weight-loss drug market.

5. Canadian Consumer Financial Health

• Insolvency Crisis: Equifax Canada reports that insolvency volumes are at their highest level since 2009. Per capita, this is the highest since 2019.
• Mortgage Stress: Delinquency rates on mortgages are rising, particularly in Ontario (up 52% year-on-year) and British Columbia (up 36%). Despite this, the overall percentage of missed payments remains low (approx. 0.2%–0.26%).
• Consumer Behavior: There is evidence of increased prudence, with a $487 million pullback in non-mortgage debt in Q1, suggesting consumers are tightening budgets in response to high interest rates.

6. The Art Market as an Asset Class

• Market Growth: Rob Cowley (Cowley Abbott) notes that the Canadian art market has seen record-breaking seasons post-pandemic.
• Investment Rationale: Art is increasingly viewed as a viable investment alongside traditional markets. High-quality, rare works (e.g., Lawren Harris, Emily Carr) have seen significant appreciation, with some Lawren Harris works moving from $2 million valuations to over $10 million in 25 years.
• Accessibility: While high-end pieces reach six figures, online auctions are providing entry points for collectors at the sub-$10,000 level.

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Synthesis/Conclusion

The current economic environment is defined by a "wall of worry" where strong corporate earnings and AI-driven capital investment are masking deep-seated consumer financial stress. While the "wealth effect" keeps markets buoyant, the rise in Canadian insolvencies and mortgage delinquencies signals a growing vulnerability in the middle class. Investors are advised to maintain a defensive posture, focusing on high-quality infrastructure and assets that offer downside protection, while remaining cautious of high valuations in credit markets. The overarching theme is one of transition: from pandemic-era stimulus to a period where geopolitical stability and structural economic shifts (AI) will dictate the next phase of growth.