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There’s more behind this week’s market nerves

2026-10-23

BeiChen Lin, CFA, CPA

Head of Canadian Investment Strategy

Economic insights Market insights

Transcript

Hi everyone, and welcome to Market Week in Review for the week of October 23, 2026. My name is BeiChen Lin. I'm a director and the head of Canadian Investment Strategy here at Russell Investments. On this week's edition of Market Week in Review, we'll be discussing three topics. First, why did this week have a slight risk-off feeling in the financial markets? Next, we'll take a deeper dive into the earnings picture. And finally, we'll wrap up with a discussion of Canada's economic outlook ahead of the Bank of Canada meeting next week. So, let's get started. This week felt like it had a little bit of a risk-off flavor to it. We saw bond yields in the U.S. fall back down, with the U.S. 10-year yield actually now dipping below 5% once again. In addition, we saw the S&P 500 fall by about one and a half percentage points on Thursday, and the Nasdaq was down by about just under 3% on Thursday as well. So, what was driving this risk-off feeling to the markets? Two factors are at play here. The first is around energy prices. The war in the Middle East has been continuing for longer than people were anticipating, and energy prices are once again rising back up. We saw WTI oil prices reach above $100 a barrel at one point again this week. And investors are wondering what that might mean in terms of economic growth. But we think it's important for investors to remember that the economic picture today is very different than where it was in the '70s. Today, the U.S. is actually a net energy exporter. And so we think that unless and until energy prices actually get to about $120 a barrel or so on WTI and stay there for a couple of months, unless we see that type of rise in energy prices, we continue to be relatively constructive on the U.S. economic outlook for the remainder of this year and going into 2027. Our base case is for trend-like economic growth. And we think that recession risks are at a normal 15% level for the year ahead for the U.S., despite the ongoing geopolitical uncertainty. The other factor that was driving the risk-off feeling in the financial markets this week was ongoing questions around artificial intelligence. And this week we saw some earnings reports by some of the large tech companies, and some of them talked about spending more on AI-related capital expenditures. Investors are asking questions around to what extent are these AI-related CapEx going to pay off? And when will that payoff come? And these are questions where the answer is somewhat uncertain. So, how can investors navigate this stretch of market volatility? From our perspective, we think that investors would be well served by staying disciplined and really focusing in on the long term rather than some of these day-to-day noises and movements that we're seeing in the markets. Next, let's shift gears a little bit and talk about the earnings picture. We're in the middle of the Q3 reporting season, and once again, it's shaping up to be another great quarter. S&P 500 blended year-over-year earnings growth is now just under 30% year over year. And it follows from two previous quarters of strong earnings growth as well. In addition, we're seeing that earnings growth in the U.S. has become more broad-based. Earnings are no longer just a Mag 7 story. In fact, the non-Mag 7 companies are actually generating higher earnings growth than the Magnificent 7 companies. And we think that this continuing broadening out of earnings will create a beneficial environment for active management. We're also seeing this strong earnings picture globally as well, with emerging markets expected to see earnings growth of more than 70% year over year for 2026. As we head into 2027, it's likely that we're going to see earnings growth moderate somewhat compared to the very hot pace of earnings growth we've seen this year. But nevertheless, we're still expecting robust and healthy earnings growth into 2027, even if it's at a somewhat slower pace. And finally, let's talk about the Canadian economic outlook. We got the inflation data earlier in the week, and by and large, it was encouraging. Headline inflation was a touch below consensus estimates, and core inflation moderated compared to the previous month on a year-over-year basis. Nevertheless, despite the encouraging inflation report, some investors are still worried about the potential for a Bank of Canada rate hike. In part due to comments by Tiff Macklem that were somewhat hawkish, but also in part due to some of the business surveys showing that businesses might try to pass along more of their costs to customers. But we think it's important for investors to remember the economic context. The growth backdrop in Canada is still fragile, with the economy running below its long-term potential. The labor market is still relatively weak, with the unemployment rate close to six and a half percent. And we still have trade policy uncertainty lingering over the Canadian economy. In addition, many of the inflation drivers we saw in 2022 are actually no longer present today. So, we think it's going to be very challenging for inflation to actually broaden out, and we think there's going to be a limit to just how high inflation can go. So, from our perspective at Russell Investments, we don't see the need for the Bank of Canada to kick off a series of multiple rate hikes to stem the inflationary impact. We actually think that there's still a chance that the Bank of Canada might leave rates on hold next week, but it will depend on the retail sales data that comes out as well as the manufacturing data. And even if the Bank of Canada does decide to raise rates next week because the market pricing has encouraged them to do so, we still don't think that the Bank of Canada needs to do multiple rate hikes at this point in time. We still think that they can be a little bit more accommodative in terms of monetary policy in order to support the economy. And for that reason, we see good value in Canadian government bonds. Thanks for tuning in.

Key takeaways

Rising oil prices and renewed AI concerns gave markets a risk-off tone this week
U.S. earnings growth remains strong and is broadening beyond the Magnificent Seven
Softer Canadian inflation and fragile growth argue against a prolonged Bank of Canada hiking cycle

Why did markets turn risk-off this week?

Our Director and Head of Canadian Investment Strategy BeiChen Lin sees two main forces behind this week’s more cautious market tone: higher energy prices and renewed questions around artificial intelligence investment.

U.S. bond yields moved lower, with the 10-year Treasury yield falling back below 5%. At the same time, equity markets came under pressure, with the S&P 500 falling around 1.5% on Thursday and the Nasdaq declining just under 3%.

Oil was one source of concern. West Texas Intermediate crude moved above $100 per barrel during the week as geopolitical tensions continued to support energy prices.

However, for Lin, the broader economic context is an important mitigating factor. The U.S. is now a net energy exporter, leaving the economy less vulnerable to higher oil prices than during previous energy shocks. The result is Russell Investments’ U.S. outlook remains constructive unless oil rises toward $120 per barrel and stays there for several months.

What is driving concerns around AI investment?

Questions around the AI investment cycle also resurfaced this week. Several large technology companies pointed to further increases in AI-related capital expenditure, prompting investors to ask whether those investments will ultimately generate sufficient returns and how long that payoff might take.

Those questions remain difficult to answer with certainty. Lin’s view is that periods of volatility like this reinforce the importance of staying disciplined and focused on long-term investment objectives rather than reacting to day-to-day market moves.

Why is U.S. earnings growth broadening?

Beneath the market volatility, the corporate earnings picture remains strong. S&P 500 blended earnings growth for the third quarter is running just below 30% year-over-year, following two previous quarters of strong growth.

More importantly, that strength is becoming broader. Non-Magnificent Seven companies are now generating stronger earnings growth than the Magnificent Seven themselves. For Lin, that broadening could create a more supportive environment for active management as leadership extends beyond a relatively narrow group of large technology companies.

The earnings picture is also strong outside the U.S., with emerging markets expected to deliver earnings growth of more than 70% year-over-year in 2026.

Does the Bank of Canada need to hike?

Finally, attention is turning to next week’s Bank of Canada meeting. Canadian inflation data released this week was broadly encouraging. Headline inflation came in slightly below expectations, while core inflation moderated from the previous month on a year-over-year basis.

Some investors remain concerned that the Bank of Canada could raise rates, particularly following relatively hawkish comments from Governor Tiff Macklem and indications that businesses may try to pass higher costs on to consumers.

Lin believes the wider economic backdrop argues for caution. The Canadian economy remains below its long-term potential, unemployment is close to 6.5%, and trade-policy uncertainty continues to weigh on the outlook. Many of the inflation pressures seen in 2022 are also no longer present.

The result is that he argues there’s currently little need for the Bank of Canada to begin a prolonged series of rate hikes. The Bank could still leave rates unchanged next week, depending on upcoming retail sales and manufacturing data. Even if policymakers do raise rates, Lin does not believe multiple hikes are necessary at this stage.

That relatively softer economic backdrop also supports the view that Canadian government bonds continue to offer attractive value.

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