Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re asking for a market outlook from Lenny McLoughlin, chief investment strategist with Keyridge Asset Management. We talked about geopolitics, inflation and the upcoming U.S. midterms. And we started by asking what he sees for equity markets in the back half of 2026.
Lenny McLoughlin (LM): Despite the uncertainty created by the conflict in the Middle East, equity markets have performed well over the first eight months of 2026. We still believe there’s further upside in equities over the remainder of this year and into 2027, really on the back of a constructive earnings backdrop, resilient growth outlook, more reasonable valuations, and investor positioning that doesn’t appear particularly stretched. The fundamental backdrop remains supportive, particularly for corporate earnings. If you look at the median company, earnings grew 15%, well ahead of the long-term average of 7% to 8%, and around 6% ahead of expectations. Guidance was encouraging, with 2.3 times more companies raising guidance than lowering it. Valuations have also become more attractive. U.S. equity P multiples have fallen from 23.1 times down to 19.7 times. Growth has also been much more resilient than expected, particularly in the U.S., despite those higher energy prices since the start of the Iran war. The AI theme should also remain an important source of support. The second quarter earnings season provided growing evidence that companies are finally beginning to monetize AI investment. While concerns around return on investment and funding may create periodic corrections in AI-related stocks, increasing evidence of efficiency gains and productivity benefits should support the overall market over the next 12 months, and contribute to the ongoing broadening of market performance.
The ongoing conflict
LM: One of the main risks to our positive outlook remains the potential for a negative shock in the Middle East. A prolonged closure of the Strait of Hormuz could push oil prices materially higher, renewing stagflation concerns around weaker growth and higher inflation. Our base case is that an eventual agreement will be reached to reopen the Strait of Hormuz and allow oil flows to normalize, as this would be in the interests of both sides. However, if the Strait remains closed for an extended period, inventory buffers could fall below critical levels and lead to another spike in oil prices. Prices of $120 to $125 a barrel would still be manageable, and would likely result in a modest slowdown in growth. However, sustained prices of $150 or above would present more serious risks to both growth and inflation, and would be a significant headwind to our positive equity outlook. With the midterms coming up, and with pressure on Trump to get gasoline prices down ahead of that, I think there’s an urgency on the part of Trump and [the] U.S. administration to ensure that we do get some resolution and reopening of the Strait of Hormuz.
Inflation and interest rates
LM: If our base case proves correct and the Middle East situation is resolved, allowing the Strait of Hormuz to reopen and oil prices to decline from current levels, inflation has probably already peaked. That would ease pressure on central banks to tighten policy further. In the U.S., the past two inflation readings have been relatively benign, with headline inflation falling from a peak of 4.2% year-on-year to 3.4% more recently. Absent another spike in oil prices, and with second-round effects still limited, U.S. inflation should remain contained. This would likely allow the Fed to remain on hold, particularly with the new Fed chair, Kevin Walsh, appearing to lean in a more dovish direction. If investors continue to price out expected Fed rate hikes, bond yields could fall and provide further support to equities. The key risk to this view is a renewed escalation in the Middle East, or failure to reopen the Strait of Hormuz, either of which could trigger another sharp rise in oil prices. In a higher-inflation environment, energy, commodities, infrastructure assets, and the U.S. dollar would be expected to perform relatively well. Within fixed income, TIPS or inflation-linked bonds would provide useful protection.
The U.S. midterms
LM: U.S. midterm elections can matter largely because markets often discount an uncertainty premium in the two to three months before polling day. This typically results in more subdued performance in the run-up to the vote. Historically, however, markets have tended to rally after the midterms, as uncertainty fades, with above average returns often seen in the following year. Current polls point towards divided government, with the Democrats taking the House and the Republicans retaining the Senate. Historically, divided government has often been viewed positively by markets because it can lead to more moderate policy outcomes and reduce political uncertainty. Overall, we believe underlying fundamentals are likely to be more important drivers of the equity market performance over the next 12 months, rather than the election outcome itself.
Portfolio construction in the current moment
LM: On a regional basis, we believe emerging market equities represent an attractive opportunity. The composition of emerging markets has changed significantly over the last 18 months, with Taiwan and Korea now the two largest countries replacing China and India. Both markets are closely linked to the AI theme, particularly hyperscaler capex, given their exposure to hardware and memory supply chains. Emerging-market earnings are expected to grow by 71% in 2026 and 24% in 2027 — well ahead of developed market peers, driven largely by strength in Korea and Taiwan. Despite this, emerging markets trade at a PE discount to developed markets that’s 23% wider than the long-term average, with Korea appearing particularly cheap. We also like industrials. Over the longer term, industrials also offer structural exposure to themes such as energy security, food security, supply chain resilience, de-globalization and re-industrialization. From a thematic perspective, quality stocks can also provide an important anchor within portfolios and provide some defensive characteristics. Earnings growth is expected to remain positive but slow somewhat in 2027 compared with this year, which should increase the value of earnings durability, visibility, free cash flow generation and operational efficiency.
And finally, what’s the bottom line for investors who want to make the most of the back half of 2026?
LM: The bottom line is, in our base case, we see further upside for global equities over the remainder of 2026 and into the first half of 2027, with double-digit gains possible. This view is supported by resilient growth, strong earnings, more reasonable valuations, and investor positioning that is not extreme. Regionally, we see opportunities in emerging market equities. Thematically, we favour quality stocks and industrials, which should benefit from the current mix of cyclical resilience and structural growth drivers. And if a resolution is reached in the Middle East and oil prices fall, inflationary pressures should ease, providing scope for bond deals to decline as well.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Lenny McLoughlin of Keyridge Asset Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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