Do Geopolitical Tensions and Oil Shocks Threaten Canada’s Market Outlook? | TDAM Talks

Justin: Welcome to TDAM Talks. I'm Justin Flowerday. Today, we're going to be talking about what's happening in a fairly volatile world, from geopolitics to markets to earnings - and I'm joined today by Vitali Mossounov. Thanks for being here, Vitali.

Vitali: Great to be on, Justin. And there's no shortage of topics to discuss right now.

Justin: Perfect. Coming into 2026, the backdrop looked quite supportive.

We were coming off three years of double-digit returns. We had really supportive fiscal policy coming into the year. We came off three straight rate cuts by the Fed in 2025  - the prospect of more in 2026  - defense spending rising across the board, infrastructure spending rising across the board. We had seen an AI CapEx supercycle which seemed like it had no end in sight.

And then February 28 happened. How does that change things from your perspective?

Vitali: Well, you painted a very rosy picture for 2026, and I think a lot of people were buying into that. As you said, three straight years of great returns, 24%, 23%, I think 16% in the U.S. in 2025. And earnings growth  - the kind of linchpin of everything, that people do get excited about, the output of all of these inputs that you mentioned  - double digits. Double digits last year, and again, strong expectations for growth in 2026.

So, war is a terrible thing, and that's exactly what the markets are dealing with now. It's a great amount of uncertainty, especially when that war is all about a particular linchpin  - in this case, of course, commodity supplies  - that are either going to flow and keep the price of oil within some reasonable rate that's conducive to the economic growth and all the stimulus you mentioned that that's coming down the pipeline, or whether it's going to be the complete opposite and make it rather difficult for the economy to succeed despite all the elements that you mentioned.

So, quite a few moving pieces now.

And I think the markets are very much trying to digest at this juncture. There are all these things that we went into the year that were rather positive.

A lot of them are still in play  - in place. But to what extent does this change things dramatically? And I think that, you know, we could talk about that quite a bit.

Justin: Yeah. I mean, look, the world with oil at 70 is different than the world of oil at 100, but both are probably manageable for the market, manageable for society and the economy to keep growing.

Oil at 150 is a different concept.

And that's going to obviously be very, very disruptive  - and most likely, if we got there for a sustained period of time, lead to a recession.

How do we deal with a world with those types of binary oil outcomes?

Vitali: Yeah, well, we have to look back at history a little bit before tackling maybe the mathematical aspect of it  - where, today, there is a terrible tragedy, a global conflict. And that we've talked about: It's affecting commodity prices.

But it's also not the very first time that, in our professional careers, and just in  - I'll just call it the post-World War Two era of financialization  - that there have been regional conflicts that have had impact on the supply of key commodities, and, frankly, many other things.

And if we look at those base rates and ask ourselves, well, how did the market respond to them over some reasonable time horizon? And that reasonable time horizon, in my view, is not five days, ten days or even one month. Because that is what is dominated by fear, uncertainty, the fog of war, the media headlines. Everyone wants to think the worst.

But as you begin to fast forward to being three, six, nine, 12 months into a conflict, what might surprise many is that the market is often not showing any meaningful statistical deviation from its normal returns.

So it's just important to say before we get into the oil part of it too deep, that  - there is that scenario, of course, that oil could be at 150. And frankly, that scenario is always on the table. There could be some conflict in some part of the world. We just had another war that started four years ago that had a very similar narrative about oil. And oil did indeed spike into the - I think the 120-130 range for some period of time.

But I would just push back a little bit, you know, if you if you permit me, because the world is remarkably good  - people are remarkably good  - companies are  - at adapting, making deals sometimes, but in any case, at least adjusting supply chains and being resilient.

Oil in and of itself: You know, I think you're the one that pointed this out the other day, our dependance on oil is not what it used to be 50, 60 years ago.

Justin: Mm hmm. Yeah. No, I think the stat I saw was in the mid seventies. I think overall expenses on oil and oil related products were something like 13% of GDP. And then last year, I think there were six.

So let's call the oil intensity for the economy maybe has been cut in half. The impact on the consumer psyche, the impact on decision making by businesses might still be  - allow for it to have an outsized impact.

Vitali: The price at the pump is...

Justin: That's right. 

Justin: You know, I guess in some ways, though, oil will do what it does. And consumers will respond and businesses might respond. But at the end of the day, it will still come down to earnings growth for the market. And that'll be the major driver of the market going forward.

And if we look at, you know, the market's performance post-COVID and we think about, you know, we've seen the market double, broadly speaking. The S&P 500 has doubled since COVID.

And what's driven that over that period of time has been 90% earnings growth. EPS for the S&P 500 went from something like 1.85 per share to 3.30 per share next year.

Vitali: Yeah.

Justin: That's 90%  - I think  - growth. And so, as we think about earnings and what's in place to continue to drive earnings, how does that play out from your perspective?

Vitali: Maybe I'll make one more comment that oil  - since, as you as you said, the intensity of the economy with respect to oil has declined  - it's still there. And so as we think about what underpins those earnings, there is a lot of transportation. There is a lot of needing to move goods across the ocean by air, individuals moving around, obviously, on their way to work and whatnot.

So as a whole, I think, the way I pin it down is: There's the direct contribution of oil and oil products' production to GDP, and there's the indirect impact. We might land somewhere in the 5 to 10% range overall when we consider the secondary effects. I would put that in a camp of material, but not overwhelming.

And when I think of the U.S. economy that you're speaking to, the change over the past few decades is that, today, when you combine (again) oil and oil products  - does not really rely anymore on imports, as it did to an enormous degree in the 1970s. And again, we're just talking about one geography here. But, of course, it is by far the world's largest capital markets and still the largest economy.

There is a great resilience, we won't call it immunity, but there is a great resilience to this shock. So going in, taking a step back then and looking at the earnings, there isn't something obvious. And again, this is a little bit contrarian maybe, but there isn't something obvious as we look at the earnings forecasts for various sectors.

16% was the number, we'll call it here in Q1, the beginning of Q2. That was  - that is  - the expectation for growth in 2026. There isn't something that is obviously happening right now through a transmission mechanism that's going to cut that number from 16  - and we'll just call it in half  - to eight. Right?

Are there pressures, and to quantify the degree that some of those might happen in the system? Absolutely. But for all of those pressures in price, there is also a response.

And I remember the response capability of the S&P 500 firms. We're looking beyond that as well, of course, and to the Russell. But generally, companies are not often subject to these exogenous shocks without having the ability to formulate some kind of response, right? And oftentimes, this is where the pricing power comes out. Right?

And it's all a delicate balancing act because you can only exercise that to the degree that the consumer can absorb it, so on and so forth. But that health of the earnings stream we're observing to be is actually expected to be rather resilient, A. And B, as we look at the breadth of it across different sectors, it might surprise some, but this would be the first year since 2018 when we have positive earnings growth for just about every single sector. Including now, most likely energy.

Justin: Right. Yeah. I mean, it's funny, we've seen a period where the, you know, large super mega-cap tech has led the market and we've started to see a bit of broadening out in the market in the last, you know, late half of 2025.

And, you know, there's lots of hopes that that continues. For it to continue, you do need earnings growth from consumer-related sectors, continued earnings growth from industrials, continued earnings growth - we're seeing a bit of a recovery in real estate. It's not a huge sector, but it contributes. When you break that down and you think about, okay, this has changed certain aspects of that story. Is there anything  - is there a sector big enough that can really derail the broad earnings growth story for the market?

Vitali: Mathematically, technology is the one, and  - I would take for those fall in the gig sectors, that's information technology and communication services, right? And were suddenly well north of a third of the market. The idea there, though, is you really have a lot of companies  - a few companies that are so large  - but so, I would say, again, resilient, to use that word, to the shocks of the economy.

We saw that in 2022 in the big slowdown, when there was impact  - the revenue growth of Microsoft and Alphabet and Meta and others  - but it wasn't nearly what it might be for a more, again, cyclical industrial company. I think those I would put in the "will watch, but generally safe" basket. Some of the expectations that are, and I won't say "elevated," but some optimistic expectations are for the industrial sector for another year of strong growth, very much informed by the enormous CapEx spending of the MAG seven.

And so, if we do, of course, get into a scenario where  - the CapEx plans these companies  - I pause because it's difficult to envision as they have just released their annual reports and signal to the market that they will - 

Justin: $700 billion of CapEx this year.

Vitali: Incredible number.

But if that were to begin to well, even stop growing, as the expectations are for further growth, but let alone shrink, then of course, the trickle down effect from that on to the industrial sector and then the consumer sector as that money is spent. That to me would be magnitudes greater as a threat than, actually, oil.

Justin: Right. Yeah. I mean, it's interesting. 

Justin: So, you mentioned, I think you mentioned 16% earnings growth in Q1. I think the expectation for the full year might be 15%.

And if you broke that down between, you know, the revenue growth for the market and then the operating leverage and margin expansion for a lot of these companies, you kind of reflect on where we've been over the last couple of decades in terms of margins and how supportive they've been towards earnings growth.

And, you know, I think we went into post financial crisis with margins sub 10% and we've seen them expand by 35, 40% and now they're at 13 and a half, 14%.

There's a narrative to say, okay, that was driven by globalization, capital-light business models in software, a whole bunch of really, really positive things for margins.

You just mentioned CapEx. We're heading into an environment where capital spending is a major theme. Capital-light software companies are being challenged by artificial intelligence.

Is there a path forward for margins to continue to expand to 15, 16, 17% (which would be incredibly supportive for earnings growth) or do you see there being maybe a bit of a headwind given all the capital intensity that's happening?

Vitali: Let's acknowledge, as you started that point: Revenue growth is pretty good in the mid-single digit range, and maybe we'll get to it later, but there's obviously a nominal component inflation helping that part out. But then indeed, the last ten, 15 years, the markets have done very well and margin expansion has been a key to that.

A lot of that, I would say the vast majority of it, has been margin expansion thanks to the technology sector and the mix, as the technology sector has become a greater and greater proportion of the overall market. In fact, what our team isolates for the non technology firms and reviews their margin progression the last 15 years there has been very little progress.

So it's really been tech. And as you said, the tech that we know so well is the asset-light tech. It is the Microsoft that needs to spend $10 billion a year, not the $100 billion per year.

Thankfully, these companies are a bit insulated from a margin perspective because all of this spending is amortized into earnings over many years.

But it is creating an enormous headwind, not only for the year ahead, but for the next decade. And so the path to margin expansion, I think, is a lot more difficult for the technology sector than it has been in the past - especially when you consider that software companies, which had absolutely no capital spending to amortize, very little operating expenses, they had historically grown faster than the market. Their market caps expanded even further on multiple expansion, and that helped the story of market expansion  - multiple expansion overall  - margin expansion.

So, going forward, it's really going to be, Justin, up to the rest of the market  - everything non-tech  - to run with the baton there.

Justin: Which really are the beneficiaries, potentially the phase two, three or four beneficiaries of artificial intelligence as they embed all the new developments into their business model and become more and more efficient.

You mentioned inflation. This is obviously on top of people's minds. Given the run up in oil and then the trickle down effects to other commodities and transportation costs, and I just saw USPS, U.S. Postal Service increased their transportation surcharge or fuel surcharge by 70%.

It's starting to have an impact, a real impact on people.

The backdrop for inflation is, you know, we had an inflation problem. And the Fed fought that problem following COVID, and they brought inflation from, you know, eight, 9% down now to two and a half percent.

We're still not back down to that, you know, 2% sweet spot  - and, if anything, starting to trend the other way.

How do you see that playing out in the current environment? And are there a couple of different scenarios that you look at where you say, yeah, that's a level inflation the market may not be comfortable with?

Vitali: Indeed, we never quite won that battle, right? We got into the mid twos and for a little while I think it looked like two was within reach and given what has happened unfortunately in the last few months, the teams get a lot of good data from our real time assessments, of what's happening with prices like your USPS anecdote and 3% is surely more likely today as we look out three, six nine months, than 2%.

So is that, in and of itself, concerning?

Well, no, the market is looking forward, and if 3% is where our assessment will land of a temporary state of inflation, then that is neither an enormous shock (as eight or 9% was) nor  - and I use the word "temporary" with sort of a lack of forecasting ability towards a geopolitical conflict  - but if it is 3% for a short duration of time, then, of course, we know the markets will look through that.

Now, numbers higher than that do become concerning.

But, again, I want to go back to earlier in the conversation when we spoke to the sensitivity of the U.S. economy to oil, what's changed over the last 50 years?

And to me, I do lean on the ability of companies or frankly, their learnings out of COVID: how to run supply chains, regain efficiencies, and respond to shocks. I think that was a great training ground for everyone.

Justin: In many ways, there was a lot of fear that the equity markets would underperform in an environment of four or 5% inflation, and they did the exact opposite  - because companies adjusted and because inflation was able to come back down quite quickly.

And so the pricing power that they're able to take and the ability to protect margins was actually quite something.

I guess the issue becomes, you know, what is the central bank response from this? And do we enter into an environment where the central bank needs to shift monetary policy and tighten it into an area where the economy can no longer grow  - has a lot of difficulty growing?

And I think there's a question around how much patience are they going to have given the duration of this conflict.

And look, I mean, I don't think there's really any answer to that. It's just something that we're going to have to continue to watch.

Vitali: Well, you know, let's unpack that a little bit more, if we could.

Because when we look back at 2021, really, the market peaked very, very late in that year.

2022 was a terrible year for returns, down roughly 20%. But that was a bear market that lasted, I think, about ten months. We bottomed that in the S&P in mid-October, mid- to late- October of 22.

To contextualize what you were asking about the potential shock and what it might mean for the markets: At a time when we had really the first major inflation shock in four decades, and inflation didn't just go to three (as may be the case today). And it didn't go to four or five or six, it went to 9  - and in many places higher than that. And most people in the financial markets have long forgotten what inflation is  - or had never seen it. And I would say there was a real argument that we weren't sure if we would be able to defeat it, because there was a real sort of  - it was a runaway train.

Justin: Right. You know, it's something we hadn't dealt with before. And everyone just thinks inflation is really sticky and will stay around that.

Vitali: Yeah. And all of that happened and the market fell, you know, 20% and nine months was the duration of the bear market.

You know, I say that because if I  - sometimes when you describe those circumstances, you might think, gosh, the market must have fallen  - that was the end of the world. Right?

So what we're dealing with today, it always feels a lot more scary and potent in the moment, because that's when the headlines are  - especially when there's geopolitics involved, right?

The market starts correcting and people make a lot of that correction.

We're down three. We're down four. We're down five  - you know, "the world is going to end." And then you look back every time, and nobody can call a bottom of the market  - that that would be a very foolish thing to do.

Justin: That's right.

Vitali: But as you said, let's just look back to pre-COVID and everything that's happened since: both the pandemic and then the - effectively, we'll call it a recession, they qualify it that way. But really, the bear market and recession of '22.

At the end of the day, the market is about two times the level. And it's not fluff. It's mostly, as you as you said in your introduction, it's 90% driven by earnings growth.

So I harp on that just to contextualize what's happening today.

Justin: Yeah, look, let's say we're down at some point in the coming weeks, 10%. Okay. So we're at  - we've had a 10% sell off.

Vitali: Happens all the time.

Justin: It does.

Vitali: Hard to believe, but it does.

Justin: It really does.

And I mean, you think about bull markets and how long they can last.

Within every bull market, there are 10% pullbacks. And I think the average pullback of 10% happens, you know, every couple of years, maybe every 18 months.

And so the big question becomes: You're down 10%. Maybe we push it to 12. What turns a 10% drawdown into a 20% drawdown  - which is typically associated with recession?

Vitali: Yeah.

And let me start by saying that for our, you know, investors on the line: When you're down ten, you always think you're going to go down 20 because down ten doesn't feel good. Right?

People say, well, this is different from last time  - they all felt terrible, right?

And when you're down ten, it's usually a terrible idea to sell because the ten converts to a 20 very rarely. And even if you get it right, good luck getting back in the market on the right times.

But let's just put that out there. And when you go into a 20, when you do have those rare instances, then it is not  - it is very much not, let's say, an exogenous temporary shock, but a structural collapse of something within  - the call it the system, the financial system or the economic system or, you know, a global  - of course, that would that would do it.

But these are things that I would say, again  - looking at the past on base rates  - if one wishes to sit back and try to predict those kind of events, I'd like to find that person that can call  - hire them immediately.

But that's not, I think, you know, statistics and market history don't push you in that direction. Having said that, you know, I think this is always on our mind: What do you pay for an asset? Right?

We're very careful what we pay for assets, and that that can be observed that a headline level, people say, you know, the market's somewhat expensive and they'd have somewhat of an argument for that.

But it's all about context. And it's expensive, yes. But for what level of margins, what level of free cash flow conversion, what level of growth? What's the constitution of the market between sectors and company quality and leverage? And what are we actually buying?

Because we're not buying the market itself. We add a layer of sophistication, complexity, and analysis on that.

Justin: Yeah. And I mean, even within the current construct, I mean, if anything, there's going to be very, very different and divergent outcomes for companies in different areas of the world based on energy sensitivity and energy dependance for companies in Europe versus companies in Asia versus companies in North America.

Vitali: You know, you mentioned other global markets. We talk about the US a lot, right? We invest a lot overseas.

Justin: Yeah.

Vitali: And the interesting thing about Japan and Europe, the other big pockets of developed markets is  - you alluded to this  - they have seen a more forceful correction since the war started. That is, in large, part a couple of reasons.

One is they have great energy dependance, rather than independence that the U.S. has.

But also they're just more cyclically-geared economies. Right? A lot of what they do is to serve the United States, if you will, the value added complex industrial products and whatnot. But nevertheless, they depend on another economy, so they're less resilient, and they don't have that anchor (if you will) of big tech these more kind of resilient, larger, global companies.

But you've seen those countries, those indices, correct quite a lot.

But it's another example of not, I would say, extrapolating things too much. Yes, those markets have corrected 10%. But when you look at a Japan (just to pick on that market), for instance, tremendous returns the last couple of years. And really driven by  - some multiple expansion, but  - driven by a real structural change in the way that the Tokyo Stock Exchange and really the people in charge over there are pushing companies to return capital to shareholders, be more efficient with their balance sheets.

Those are real changes. And what they're unlocking is a great shelf of companies that are selling  - producing and selling and inventing, first and foremost, world-class industrial consumer products that are now powering this AI revolution.

So as we look across the world  - I'll probably stay on the Japan thing, but it does apply to Europe quite a bit  - yes, there can be a sense that, look, Japan, well, they don't produce any energy, right? They've got to bring everything in. So they've shut down a lot of their nuclear, like  - "This is the end for Japan!"  - and it can feel like that in the short run.

But then you look around and say, hold on, there is a market that's down 10%, that is  - but the secular trend from the US via AI, that's driving great revenue and earnings growth and margin expansion for their companies, well, that's very much alive.

The structural forces that are helping them unlock this value for shareholders  - that continues. And, well, Japan just happens to have per capita enormous and the largest strategic petroleum reserves that they're unlocking that can easily get them through several quarters. And so, you know, I just kind of  - it's the theme of today.

But so many people will look at the headlines and say, "Well, that's time to panic."

And I think what we do very well in this firm is: When we actually unpack everything, and say, "Well, in fact, it might be time to do the opposite."

And that's a great part of the kind of debate that we have, including on many of our committees and discussions across the leaders in the firm. 

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