Nicola Wealth Market View
2025 closed as a strong year for equities, even as December returns were mixed and underlying pressures became more visible. Equity markets across regions delivered double-digit gains, supported by earnings growth and easing financial conditions. At the same time, rising long-term bond yields, elevated valuations, and increasing concentration beneath the surface suggest a more demanding environment as markets move into 2026.
A defining feature of the current backdrop is how much market momentum depends on earnings growth. Returns have been driven primarily by profits rather than valuation expansion, with a narrow group of technology and AI-related companies carrying a disproportionate share of expected gains. This has supported performance, but it also leaves markets more sensitive to changes in rates, earnings delivery, and policy expectations.
Policy dynamics remain central. Despite the Federal Reserve beginning to cut rates, long-term yields have not declined as they typically do, reflecting concerns around inflation, fiscal supply, and longer-term risks. Combined with growing affordability pressures and political scrutiny ahead of U.S. midterm elections, the margin for policy error appears to be narrowing.
In this environment, upward movements in the market remain possible, but sustaining them may require more balance and selectivity as supportive conditions coexist with emerging constraints.
Below is a condensed version of Chief Economist Rob Edel’s Market Commentary, offering key highlights from December's market activity. To read the full commentary, click here.
Strong full-year returns, but a more demanding backdrop ahead
Wall Street optimism remains elevated, though signals are diverging
Rising long-term yields are altering the market environment
Earnings growth is doing most of the work, narrowly
Policy and affordability pressures complicate the path forward
Strong full-year returns, but a more demanding backdrop ahead
Despite a mixed December, 2025 delivered strong results across global equity markets, with international and Canadian equities leading the way. U.S. stocks also proved resilient through geopolitical events and policy uncertainty. Strong market performance has reinforced confidence, but it also raises the bar for what markets need to deliver to sustain gains from here.
Wall Street optimism remains elevated, though signals are diverging
Most strategists expect further gains in 2026, with consensus forecasts pointing to continued upside for the S&P 500. At the same time, history shows that year-end targets are an unreliable guide, and seasonal indicators are sending mixed messages. This divergence highlights the importance of focusing on underlying drivers rather than short-term forecasts.
Rising long-term yields are altering the market environment
Unlike prior easing cycles, long-term bond yields have risen even as the Federal Reserve has begun cutting rates. This suggests markets are reassessing longer-term inflation risks, fiscal supply, and global rate pressures. Higher yields can weigh on equity valuations and contribute to greater volatility, particularly in rate-sensitive areas of the market.
Earnings growth is doing most of the work, narrowly
Corporate earnings have been the primary driver of recent market returns, with valuation expansion playing a limited role. Technology and AI-related companies, particularly the Magnificent Seven, account for a large share of expected earnings growth in 2026. This concentration means market outcomes are increasingly tied to a smaller group of companies, amplifying the impact of any shift in expectations.
Policy and affordability pressures complicate the path forward
Growing affordability concerns and political pressure ahead of U.S. midterm elections are narrowing the Federal Reserve’s policy options. While rate hikes appear unlikely, aggressive easing carries its own risks if inflation reaccelerates. The resulting policy trade-offs leave less room for missteps, underscoring the importance of maintaining flexibility as conditions evolve.
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. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. All values sourced through Bloomberg, unless otherwise specified. Nicola Wealth Management Ltd. (Nicola Wealth) is registered as a Portfolio Manager, Exempt Market Dealer, and Investment Fund Manager with the required securities commissions.
