MONTHLY MARKET MUSINGS

February 2026

Slow Out Of The Gate

The year has started with equities trading in a choppy disorderly manner. The slow incremental moves higher that come from small consistent daily gains seem to be wiped out by short-lived aggressive negative overreactions. The most recent earnings season kicked off earlier in January and the results continue to show strength. That said, we have seen some harsh reactions to mostly solid results from some companies. The U.S. Federal Reserve (Fed) held its key interest rate steady following a series of cuts in back half of 2025. At this stage, the expectation is for two cuts in 2026 which would take the rates down to a range between 3.00%-3.25%. The Bank of Canada (BoC) also held its overnight rate at 2.25% as forecasted by economists. It remains widely expected that the BoC rate will stay at this level for the year and that we will begin seeing rate hikes as we enter 2027.

In other U.S. Fed news, Kevin Warsh, a former Fed governor, has been nominated as the replacement to current Fed Chair Jerome Powell. Warsh has been labelled as someone who historically has tended to be hawkish from a monetary policy stance. In the past, he has shown much concern for high inflation and has tended to lean towards higher rates to curb the inflation.[1] He has also been known to be a critic in the past of several Fed policies, specifically, when it comes to their outsized balance sheet and the policies used to increase the money supply. The U.S. Fed balance sheet has grown from approximately US$800B in 2005 to over US$6.5T in 2026.[2] Recently, he has had a more dovish stance in regard to monetary policy which aligns with the U.S. President's opinion. Warsh's view seems to be that interest rates could be lower without it causing any major concern for increased inflation. This is due to the disinflationary effects of emerging AI and the further integration of technology throughout the economy. Whether AI and technology would entirely offset any inflationary effects of lower rates is up for debate. There is truth, however, to the fact that technology does have a disinflationary impact on the economy as it reduces costs for most businesses and improves overall efficiencies. AI, automation, robotics, etc. all characteristically allow companies to produce more goods in a timelier manner using fewer resources. So, perhaps if we do see the impact of AI and automation that many are anticipating this year, it would allow for more than the two interest rate cuts and then Warsh would have been correct in his assessment. If that were the case and we were to see more rate cuts than are currently expected, this would add more support for stock prices and give more reason to investors to allocate towards U.S. equities.

As we have highlighted in the past, despite the ongoing volatility we expect the market to continue to gain ground. This cyclical bull market has now entered its fourth year - having started in October 2022 - and while it can be considered a mature bull market (cyclical bull markets typically average 5 years)[3], it does not seem to be quite at the end yet. Cyclical bull markets have produced total cumulative returns of about 177% on average. Currently, the S&P 500 Index has had a total return of about 90-95% since that low in 2022 (this assumes that dividends have been reinvested). This suggests that while many believe the market to be frothy and overvalued, it is producing a more modest return than it has in the past on average during cyclical bull markets.[4] Furthermore, according to Morgan Stanley, since the 1950s, the S&P 500 Index has produced returns that have averaged 13.7% in the fourth year of a cyclical bull market. The lowest return happened in 1990 when the return was 1.1% while the highest was in 1982 with a return of 29.7%.[5] The two most recent periods from the early 2000s, had returns of 12.9% and 13.2% in the fourth year of those cyclical bull markets. Now, of course, these are averages and it does not guarantee that this is exactly how it will play out. It does, however, suggest that the historical market trend calls for a higher equity market and that aligns well with the current healthy U.S. economic backdrop and the equity-supportive policies at the monetary and fiscal levels.

JAY SMITH, CIM®, FCSI®

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA®
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com