David: Hi, everyone. My name is David Sykes. I'm a Senior Vice President and Chief Investment Officer with TD Asset Management. I'm also the chair of the TD Wealth Asset Allocation Committee. Today, I'm joined by Kevin Hebner, managing director, global investment strategist, TD Epoch, and also a member of the TD Wealth Asset Allocation Committee. Today, we're going to unpack three things for you.
We're going to talk about 2025 and returns and what drove those returns in capital markets. We'll talk a little bit about our outlook for 2026 in terms of major asset classes and what we feel is our secret sauce for portfolio excellence at TD Asset Management. And then lastly, we'll talk about opportunities and potential risks as we go into 2026.
So, Kevin, with that as an intro, looking back on 2025, an interesting year. They always are. What were some of the bigger macro things that sort of took you by surprise?
Kevin: Yeah, so one thing that stood out was Liberation Day. So, April 2nd, Trump announced all these new tariffs. We then had a lot of volatility in market for three weeks. China put a lot of pressure on the U.S. and then we had the first “TACO” trade for the year. Trump always chickens out. The second “TACO” trade happened at the end of October, and I think a big reason for risk assets doing so well was the “TACO” trade.
So, Trump does need to get along. He does need growth in the U.S.
David: Yeah, there certainly seem to be a lot of saber rattling and big talk. But I think at the end of the day, much of that was walked back, although you probably wouldn't want to point that out to the American president. But I think a lot of that big talk was toned down a little bit. And then if I reflect on ‘25, I think what's really surprised me is there's a bit of an exaggeration, but almost everything went up.
I mean, the Canadian equity market was up over 30%. The S&P 500, including dividends, well over 15%. European equity markets, China, Hong Kong, everything to the positive. If I think about fixed income - universe bonds in Canada were up six, seven, 8%. IG (Investment Grade) High-Yield up a little bit more than that. U.S. “Ag” (Agricultural) bonds were up. The commodity complex was up.
If I think about our alternatives, private capabilities - Canadian real estate was positive. Global real estate was positive. Private debt had a good year. Mortgages had a good year. If I think about our infrastructure fund, another double-digit year. So, to me, the real surprise was that almost everything worked in 2025. I think the only exceptions that we found were that the Japanese bond market had a bit of a sell off.
Wheat, the commodity, if anybody's interested in wheat, it was slightly negative, and the price of oil was down. But other than that, it was a really strong year across the globe.
Kevin: Yes. Yes.
David: So, with that 2025 review in the rearview mirror, let's talk a little bit about expectations for 2026. I'd be curious to get your thoughts on the wax outlook for U.S. equities.
Kevin: Yes. So, the U.S. equity market outlook is quite constructive. Earnings growth, we think, is going to be strong above 10%, particularly for the tech sector. There's going to be a lot of liquidity with the Fed cutting and then deregulation measures coming through the bank supervision part of the Fed. So that’s going to be positive. And trade tensions, as we were mentioned before, will probably be muted, certainly muted relative to 2025.
The big risk, I think for next year is the AI CapEx cycle. So, this is pretty extreme during 2025. Expectations for next year are very strong by retracing some jitters about the enormous amount of spending that has been forecasted for next year.
David: Yeah, if I think about ‘26 for the U.S., it's pretty clear. I think we're all in agreement. We do see fiscal stimulus coming in. We see monetary stimulus coming in with Fed cuts. We can talk a little bit about it in Fed independence. You know, the AI trade, there's some risks there. But we think that really is a productivity enhancing tool.
We think about bank deregulation, the liquidity you mentioned. So, we have a pretty good positive, optimistic outlook for the U.S. on the Canadian side, I think it's equally optimistic, but I think it's for different reasons. I think, one, you really see the Carney government in their latest budget talk about a real stimulus package. I won't go through all the gory details, but, you know, $260 billion of initiatives between now and 2029, I think that's a real effort.
And I think to me, it's the first time in a long time that the country and the leadership's been really serious about productivity initiatives and these major projects, and I think that's going to bode quite well. The multiple in Canada, you know, it has moved. Canada is trading at about sixteen and a half times forward dividend yields about 2.4.
So, yes, it's more expensive than it was at the beginning of 2025. We still see good runway in Canada. I'd be curious to get your take on global equities as well.
Kevin: So global equities, I think also constructive outlook, there's not necessarily a tremendous policy story or growth story coming from it. But U.S. equities, for example, traded at a very big valuation premium relative to markets in Europe, Japan, China and so forth. It's not clear that premium is justified by some much better fundamentals. So, we look at global champions in the U.K., Europe, Japan, China, and many companies are very interesting to us.
And there has been a long debate. Is China investable or not? But we think very much China is investable. And I think the possibility of a US-China sort of narrow trade agreement will be a nice impetus for that trade next year.
David: And it does seem, you know, a lot of people are worried about sort of the saber rattling with tariffs and trade. But to your point, tensions have come down a lot. Maybe talk a little bit about a couple of meetings next year.
Kevin: Yeah. So, Trump will go to Beijing in April and then President Xi will go to the United States both in November and in December for the APEC meeting and then the G20 meeting. One of those meetings might be a state visit for President Xi, which would be the first one since 2015. So, a lot of photo ops opportunities for them to talk to come up with transactions.
And we think a narrow trade deal is possible.
David: Okay. And then if I step back and now switch asset classes away from equities and think about fixed income, give me the wax view sort of on fixed income outlook for 2026.
Kevin: So, I think, again, for example, in the United States, we see Fed cuts coming through. The markets is priced in to we think given changes in the Federal Reserve Board with Powell leaving and maybe other people leaving in May that you get a dovish Fed. So, we get more cuts than the market's expecting three or four, for example.
So, you get curve steepening and then that augurs well. Japan is a different market. It's the only place really where we have the central bank cutting. And that's interesting. You've had the ten years go up 100 basis points and that's been as you're mentioning earlier, one, the negatives, but overall, overall, a modestly constructive outlook for fixed income next year.
David: Yeah, and I would agree, and I'll just add on the Canadian side, I think I think a couple of things to note. You know, Bank of Canada was early, and I think often in their rate cutting cycle, we're now at two and a quarter. I think it's fair to say as a committee, we think they're done. We suspect we probably agree with consensus that the next move by the Bank of Canada would be late fall of ‘26, perhaps a hike.
But I think the one thing that we really agree on is, you know, coming out of the COVID era when inflation was seven, eight, nine percent you know, right now Canadian inflation is running something like 2.2%. Look, we could trend back up to two and a half, maybe to three. But I think in that environment, we're okay would be if we, you know, spiked up to four or five.
And I think from where the committee sits, in our view on inflation, we just don't see that right now. So, our expectations for Canadian fixed income, you're going to get yield like returns. And so currently that puts you in the three and a half to four and a half percent bucket. And I think that's a fair outlook. If I switch over to the alternative side on our private markets, I think one thing that we absolutely firmly believe is that the demand for infrastructure projects, infrastructure power, is just not going away.
And so, we expect another very, very strong year for infrastructure. I think the demand for private debt continues, although I do like the TD Asset Management version with a little bit higher credit quality lens. So, I think another good year in private debt. It will be interesting to watch Canadian real estate. Canadian Real estate this year started to turn, and I think we're expecting a more positive year in ‘26.
Probably low single digit returns, but again, positive there. And then if I think about global real estate, it's actually already turned, and we've had nice returns so far in ‘25. I suspect more of the same in ’26. And then, you know, the one thing we always, always do believe in are commodities as a diversifier. I think that's going to be a very important asset class as we go through.
But I'd love to get your take just before we finish this section of the talk, talk about currencies, because I know you spent a lot of time thinking about the direction of the US dollar.
Kevin: Yeah. And just on what you're saying in terms of the alternative asset classes infrastructure, which we've talked a lot, these nice secular tailwinds with both the buildout for AI and re industrialization. So, it does look like a secular bull market there, in terms of currencies. So, a bearish view on the US dollar, it's overvalued relative to pretty much all other currencies and sometimes pretty significant, especially against renminbi and against the Japanese yen, moderately so against the Canadian dollar.
And part of the reason for that is aggressive fed cutting, but also a loss of US exceptionalism as we see Trump get more involved in the Federal Reserve Board on the trade side. And so, some of the positives ex tech for the United States waning a bit relative to other countries.
David: And so, Kevin, you know, as we come to the end of this section, I think really about we've talked about a lot of asset classes. And I think the important thing for listeners and viewers is when we talk about TD Asset Management, what does that mean for how we're managing our portfolios? And I think it's very important to mention that, you know, we are overweight equities.
We firmly believe in Canada and the United States next year, I think for slightly different reasons, we would be underweight EM and underweight EAFE on the fixed income side. Look, we still enjoy fixed income. We think you're going to get yield like returns, but I think we'd be underweight there. But I think the real secret sauce here is the privates.
On the alternative side, we are able to get that exposure to those asset classes that you can't necessarily get on your own institutional type portfolios. And I do believe, as you mentioned, that infrastructure trade seems very obvious to me. Maybe that's the kiss of death, but it does seem very obvious, I think, about our commercial mortgage product, all those things that Privates gives you, which is that stable, consistent, you know, better than inflation returns.
I think that's something that's really valuable and the way we put together portfolios and then our fourth ingredient is always cash. And we as always, we always want to have some cash, but I think we'd be lighter to underweight in our cash position.
Kevin: Absolutely.
David: So, Kevin, maybe we can talk about our third and final section on the agenda, which is really risks and opportunities for next year. We've given a pretty bullish, optimistic outlook, but of course, we always want to be balanced. One of the things that are on your mind that maybe could go wrong and aren't fully priced in are some risks we should think about.
Kevin: So, there's two that I would highlight. The first one concerns the AI CapEx growth story. So forecast offer about $600 billion be spent in the U.S. next year on CapEx. That's about 2% of U.S. GDP,
David: $600 billion? Big number!
Kevin: That's a big number. The only historical analog to that is the railway boom, 150 years ago. The economy was a lot smaller at that time.
So, AI is transformational. It's going to result in all sorts of new industries. Industrial robots might be the biggest industry ever, but maybe it's just spending is happening too quickly ahead of the trajectory for revenues. So, there might be a down set, a down cycle on that, but still strong positive growth, but a little less than 40% per year what we've been saying.
David: Yeah, And.
I think just to reinforce, I think we believe as a committee very much that, you know, the productivity enhancing nature of AI is real. But when you start to get to some of these CapEx numbers and start to worry a little bit about the return on that investment, you know, there could be a pause, but I think it's a very different view than what we had to say of the dot com era.
Like this is real and we think there's a lot of investment. But, you know, it's always tricky to time that investment to get it right.
Kevin: Yes, absolutely. Timing, the top, timing the bottom. Nobody is that smart. And people use the term bubble. I don't think there's a bubble that's too binary a term. And maybe there's an LLM bubble or maybe in private markets there's a bubble and maybe there's some companies are overhyped. But broadly, nothing like 25 years ago.
David: Yeah. Very different what we saw then. And then maybe just sort of in terms of our WACC conversations, another big risk or a possibility of risk that you see?
Kevin: Yeah. So, the second would be the US-Canada negotiations with USMCA or CUSMA. And so, there's three possibilities an extension, a renegotiation or an exit. I think a pure extension and without any changes I think is quite unlikely. Maybe a 10% probability. A total exit is also quite unlikely because the two economies are so intertwined. So it's the nature of the renegotiation and the USTR (United States Trade Representative) for the United States, Jamieson Greer, has really recently said that he'd like to separate the negotiations occur and exist with all three countries to have the U.S. with Mexico in U.S., with Canada.
Given that the issues are so different, the nature of the economies and trade is so different, and I think that seems highly likely.
David: Yeah. Okay. I mean, I think I think the biggest risk would be just an outright exit. But I think you and I equally would agree that that is a low probability event. It's possible, but we certainly wouldn't put high odds on that. You know, from my perspective, as I look into next year, one of the things that I worry a little bit about is just the valuations on U.S. stocks.
You know, at the market level, we're trading at something like 22 and a half, 23 times forward earnings, which I wouldn't say is, you know, nosebleed. It's not all-time high. But you do worry versus, you know, an ex-ing out of the Mag Seven, the multiples more like 19 or 18 are a little more reasonable. So, you worry perhaps you could get some multiple compression but as you talked about, we do think earnings growth is going to be strong next year.
Consensus has added, you know, 10, 12, 13%. And I think the one thing as I look into next year, it may not it's not necessarily a risk, but I think it's an opportunity that we should be aware of, which to me is this year was all about concentration. You know, the top ten stocks are attributable for a lot of the return this year.
What I think what I think we've started to see in this quarterly earnings season, we started to see the other 490 stocks. The broadening out is started now it's early and this is not definitive evidence, but I would just say in Q3 earnings, what you saw were substantial earnings surprises from the other 490 companies. It wasn't just, you know, the top ten.
David: The other thing and again, this is very early, but in the last five weeks we started to see the equal weighted S&P (index) outperform the market cap-weighted S&P (index) by a fair bit by something like 3%. So again, it's early, but I think there's a fair argument to be made here, which is to say, you know, those ten stocks have driven 75% of the returns for the market in the United States over the last three years.
If we could get a broader participation from those other 490, I think that's how we move earnings higher and ultimately move stock prices higher. So that's something that would be on my wish list for next year.
Kevin: Yeah, I'd make two comments on that. One is the forward multiple for the S&P. It's a bit elevated relative to history, but margins are also very elevated relative history as is return on invested capital. And we have a lot of free cash flow generation and so it should be trading on a higher multiple, maybe not quite where it is now, but it's not nosebleed.
Kevin: So, it could be marginally elevated. The second point on the concentration, if you have the top ten companies in the S&P representing 40% of market cap, the concentration risk is a big deal. And so, diversification is always something investors should be thinking about. Diversification within the U.S. to the other 493, but also diversification abroad into global champions in Europe, UK, Japan and China, I think is important.
David: Yeah, I think that's always been a fair phrase of mine, which is, you know, the only free lunch in this business is diversification and we should use it. So, I think that's a very, very good point and a good point to end on. So, Kevin, thanks very much for joining me today. Hopefully, we've given our listeners and viewers a good summary of what happened in 2025 and why We've talked about all the major asset classes in 2026.
David: We've also talked a lot about, I think, the risks and potential opportunities in the year ahead. So once again, thank you so much. And we hope all the listeners and the viewers have enjoyed our conversation today.
Kevin: Thank you, David.
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