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Market & Portfolio Highlights
- Market Trends: Global equities remain supported by strong earnings growth, though Artificial Intelligence (AI) leadership may be shifting as higher rates pressure early-cycle winners. Meanwhile, energy price volatility and tighter monetary policy continue to influence markets and inflation expectations.
- Asset Class Views: TDAM maintains a constructive view on equities and continues to see opportunities across global markets. Higher real yields support fixed income and diversification benefits, while private markets may offer attractive income and improving fundamentals.
- Key Takeaways: Higher bond yields continue to offer attractive income potential, while commodities and alternative assets can help strengthen portfolio resilience amid geopolitical and economic uncertainty.
Views Provided by the TDAM Client Portfolio Management team
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Equities
- Index returns continue to mask a meaningful shift beneath equity markets. This shift is most apparent in AI and AI infrastructure.
- AI remains a significant, investable theme, supported by hyperscaler investments and early returns on spending, but the trade may be shifting.
- Financing concerns, market structure, and higher rates have pressured early-cycle winners, particularly names linked to data center infrastructure. Well-funded hyperscalers, meanwhile, have held up relatively well.
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Fixed Income
- Higher real yields and anchored inflation expectations support strong income potential and reinforce the diversification benefits of core bonds.
- Increased confidence in the U.S Federal Reserve's ability to control inflation makes owning longer-term bonds more compelling.
- Yield without the reach: Investment-grade bonds can offer attractive income without moving down the credit spectrum.
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Private Markets
- The broad real estate market continues to deliver attractive income and improving fundamentals, with retail standing out for strong income growth and leasing activity.
- Retail supply has not kept pace with Canada’s population growth, reducing retail square footage per capita and driving rent growth above inflation.
- Major regional shopping malls across Canada are generating higher in-store revenues and foot traffic than pre-pandemic levels.
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Asset Allocation
- U.S midterm elections season has put fiscal policy and regulation in focus, but history suggests markets can perform well regardless of political control.
- Democratic administrations have averaged 15.1% returns, versus 10.9% under Republican administrations.
- Republican trifectas have produced the strongest average annual returns at 16.3% , compared with 12.6% under Democratic trifectas.
- Divided governments have averaged 12.3% annually , reinforcing that economic fundamentals, earnings and monetary policy generally matter more than political affiliation.
TD Wealth Asset Allocation Committee Strategic Portfolio Positioning
The following outlines the WAAC’s views over a 12–18 month horizon.
- Fixed income moved to neutral from modest underweight, as elevated bond yields can offer attractive income and portfolio diversification benefits
- Equities remain constructive, supported by strong earnings growth and broader participation beyond AI-driven sectors
- Private markets and alternatives remain attractive, offering diversification, resilient income streams and the potential to enhance portfolio stability over the long-term
Core Asset Class Allocations
Asset Class Views and Outlook
The Canadian government continues its push to implement pro-investment policies through the "Productivity Mega Deduction" incentive and efforts to streamline project permitting. However, U.S. trade remains a source of uncertainty. The S&P TSX Composite Index (TSX) sector mix acts as a diversifier for U.S. and emerging markets, that are heavily influenced by the Information Technology sector. TSX returns are supported by strong earnings growth, balance sheets, and shareholder friendly dividend and buyback policies.
Year-to-date U.S. equity returns have been driven by very strong earnings growth, while valuation multiple contraction prices in the expectation that earnings growth will decelerate next year. Information Technology sector growth remains robust, with earnings growth broadening across sectors and small-caps. Tax policies under the "One Big Beautiful Bill Act" and the potential for further deregulation offer additional tailwinds. Key sources of volatility include shifts in AI sentiment, headwinds from higher interest rates, and geopolitical uncertainty.
International equities earnings growth, while positive, remains lower than in other markets. European earnings could face additional headwinds if energy costs remain above pre-conflict levels. The Japanese market has rallied on the back of corporate reform, a more pro-growth government, and benefits from AI spending, but there may be volatility as the Bank of Japan has raised rates.
Emerging Markets provide exposure to technology companies with strong earnings growth potential driven by AI spending. China continues to face challenges with weak domestic activity and its property market, but its export oriented sectors have been robust.
Renewed global energy price volatility is drawing the BoC's attention to upside risks to inflation. While domestic policy remains anchored, further moves in yields are likely to be driven by U.S. rates and global term-premium developments.
Softening AI sentiment and rising government bond yields are creating greater dispersion within the investment grade bond market. The cost of debt-financed growth has increased while the pace of AI-related issuance is expected to persist, resulting in underperformance in sectors such as Information Technology and Communication Services. Nonetheless, a resilient economic growth backdrop should support fundamentals and keep spread movements relatively contained.
As developed market central banks raise policy rates, investors' inflation concerns are expected to stabilize. This can help anchor or even reduce volatility of global long bond yields. This creates attractive income generating opportunities, net of currency hedges, for Canadian investors in select markets.
Emerging market government bonds generally screen fair to rich relative to developed market government bonds. Total returns in emerging markets may face downward pressure from currency volatility amid the U.S. Federal Reserve's focus on hiking interest rates to tame inflation. However, we still expect pockets of opportunities in select countries where income levels are attractive.
Higher bond yields are tightening borrowing conditions and will likely constrain cash flows for high yield borrowers. The weakest cohort of issuers are particularly vulnerable to rapidly rising funding costs and these concerns are driving overall credit spreads wider. While we are more cautious on the sector, we remain neutral given the improvement in valuations and continue to favour a higher quality positioning.
Commercial mortgages continue to provide accretive income while insulating investor returns from the increased volatility in interest rates.
We believe most value adjustments in Canadian commercial real estate are complete. Office occupancy (especially in Toronto) has begun to improve as large users mandate returns to office. Despite U.S. tariff policy volatility, Canada's industrial market remains healthy. Poor condominium markets and lower immigration have temporarily pressured residential rental rates in Toronto and Vancouver. Long-term multi-unit residentials will likely see strong rental growth due to structural supply-demand imbalance.
Returns are starting to improve globally. U.S. and Asian Pacific markets have seen the capitalization rate stabilizing, while Europe continues to outperform. In Japan, strong office, residential, retail, and hotel fundamentals continue to support rental growth despite rising rates. In Korea, healthy office, industrial, and hotel markets should support stable returns, though higher financing costs are making performance increasingly income-driven.
Infrastructure continues to offer stable returns and lower volatility due to its essential long-term nature. The persistent global infrastructure spending gap remains a key investment driver, reinforcing the need for increased investment. Additionally, accelerating trends such as the electrification of industry and the expansion of digital infrastructure are significantly increasing demand for power generation, energy storage and supporting infrastructure, creating compelling investment opportunities.
Global Private Credit provides premium income through diversified global origination across corporate, real estate, infrastructure, and specialty finance, including middle‑market corporate relationships. TDAM’s robust credit risk infrastructure supports strong governance and disciplined access to attractive risk‑adjusted return opportunities.
High credit quality along with sectoral and global diversification can provide a resilient income ballast in a volatile market environment. A robust illiquidity premium can potentially provide an income boost in an environment of narrow credit spreads. Incremental income and potential capital appreciation from interest rate moderation may provide upside. However, tight credit spreads and further increases in longer-term interest rates could constrain returns, supporting a somewhat cautious stance despite attractive income opportunities.
Commodities have strengthened amid supply disruptions, particularly in energy, natural gas, and select industrial inputs. Recent gains appear driven more by curtailed supply than excess demand, reinforcing commodities’ role as a portfolio diversifier during periods of geopolitical stress.
Longer-term valuation metrics suggest the USD remains overvalued, supporting a modest underweight positioning. While the USD continues to benefit from safe-haven demand amid ongoing geopolitical uncertainty, upside versus the CAD may be more limited from current levels. Canada’s softer growth outlook and sensitivity to global trade dynamics continue to act as near-term headwinds for the CAD, partially offset by support from elevated energy prices.
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