Nicola Wealth Market View
It was a pleasant end to summer for investors, with August delivering another solid month for global equities. U.S. and Canadian markets extended their summer rally, and volatility continued to decline – just what investors like to see heading into fall. Gains were not limited to the usual leaders, as equal-weight indices outperformed, suggesting a potentially healthier and more broadly based advance.
At the same time, investors face a more complex backdrop. Going forward, technology and AI leadership will be tested, valuations remain elevated, and fiscal concerns are rising – and while markets bet on rate cuts later this year. These crosscurrents highlight why diversification and risk management remain critical as we move into fall.
Below is a condensed version of Chief Economist Rob Edel’s Market Commentary, offering key highlights from August's market activity. To read the full commentary, click here.
Market performance with broadening rally
August delivered another month of solid gains, with the S&P/TSX up +5.0% and the S&P 500 up +2.0% (total return). For U.S. large caps, it was the fourth straight positive month, bringing their four-month gain to +16.5%. Canadian equities continue to lead year-to-date, up +17.6% compared with the S&P 500’s +10.8%.
Notably, the rally is broadening: equal-weight indices outperformed cap-weighted indices in August, suggesting more sectors and stocks are contributing to market performance. This widening participation could make the rally more durable — though sentiment surveys still show more bearish than bullish investors, pointing to lingering caution.
AI and Big Tech under pressure
Technology and AI remain at the centre of market performance, but cracks are starting to show. MIT researchers recently found that 95% of organizations are seeing no return on their AI investments, and Apollo reports adoption rates are already declining among larger firms.
This presents a challenge for the Magnificent 7, which have invested billions in AI infrastructure. Societe Generale notes these companies, once known for robust free cash flow, are now becoming more capital-intensive. Whether today’s spending will translate into tomorrow’s productivity and profits remains a key question for markets.
It’s still early, but a lot is riding on the assumption that today’s heavy capital spending will translate into higher productivity and profits in the near future.
Valuations stay elevated as Fed decision looms
U.S. equities remain expensive by most measures: 91% of global fund managers in a Bank of America survey view them overvalued, and Bloomberg notes that prices have outpaced earnings expectations. Despite this, valuations alone are not a reliable short-term trigger — markets can stay expensive for extended periods.
Investors are focused on the Federal Reserve, with markets pricing in a possible September rate cut. Such a move could extend the market top, but if inflation remains sticky and the Fed holds off, a correction is possible.
Rising yields and fiscal dominance risks
Even as short-term rates fall, 30-year yields have been rising globally, steepening yield curves. This reflects investor concern about deficits, inflation, and the cost of servicing record levels of government debt.
Political pressure on the Federal Reserve is increasing, with President Trump threatening to remove Federal Reserve Chair Powell and Governor Cook. If the Fed is pushed to keep rates artificially low – a scenario known as “fiscal dominance” – it could usher in an era of structurally higher inflation and weaker institutional independence.
Gold, dollar and institutional confidence
Gold prices are moving higher even as the U.S. dollar stabilizes, often a sign that investors are hedging against inflation and credibility risks. The Bear Traps Report highlights that hard assets like commodities tend to outperform when inflation is high and confidence in institutions is eroding.
For now, foreign demand for U.S. assets remains relatively strong, as evidenced by the robust international buying of Treasuries and equities in May and June. But if the dollar weakens further, capital flows could reverse – a risk worth watching closely as markets weigh the implications of fiscal dominance and future Fed policy.
For deeper insights from our Chief Economist, get access to the full commentary
Disclaimer
*This material contains the current opinions of the author, and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information presented here has been obtained from sources believed to be reliable,but not guaranteed. Nicola Wealth Management Ltd. (Nicola Wealth) is registered as a Portfolio Manager, Exempt Market Dealer, and Investment Fund Manager with the required securities commissions. All values sourced through Bloomberg, unless otherwise specified.*
