The outlook for equities remains positive heading into 2026, but returns will likely be lower, and major downside risks remain, according to Desjardins Group.
In a new report, the firm’s economists forecast continued positive returns from stocks in the year ahead — with the S&P/TSX index expected to gain 14%, the S&P 500 forecast to return 12% and MSCI EAFE index predicted to gain 9% — representing a slowdown from this year’s returns for each benchmark.
“The consensus anticipates a broadening of earnings growth,” the report noted. “We share that view, although we are slightly less optimistic on overall earnings growth.”
Canadian stocks are expected to outperform the broad U.S. market on the strength of elevated commodity prices and the performance of the big banks, which have “navigated the mortgage renewal cycle with relative ease so far thanks to the aggressive cutting cycle from the Bank of Canada,” it said.
Additionally, domestic stocks are set to benefit from strong fund flows.
“Mutual fund and ETF flows into Canadian equities have already outpaced flows into the equities of other jurisdictions, and we see scope for this trend to persist into next year,” the report said. It added that equity markets are becoming less synchronized, which “should continue to drive asset allocation away from the U.S. at the margin.”
Indeed, the report said it expects the diversification away from tech-heavy U.S. indexes to continue in 2026.
And, it noted that the heavy reliance on AI investment to drive returns in U.S. stocks poses downside risks — including the possible failure of AI companies to deliver expected earnings, particularly as the so-called “hyperscalers” ramp up their debt issuance; and, the risk of investors souring on the AI theme generally.
Moreover, if the U.S. economy proves weaker than expected, “equities could face a sharper correction than usual,” the report warned.
“Much of this stems from the likelihood that economic weakness would delay AI adoption as companies tighten spending,” it noted. And, “any meaningful decline in leading AI names could quickly morph into a broader market event,” it cautioned.
“Heightened concentration within U.S. indices amplifies this risk, making the trajectory of AI-driven growth a critical factor for global markets in 2026,” the report concluded.