Fiscal stimulus, AI spend, labour market will set tone for 2026

Market participants may want to invest in a good set of ear muffs in 2026, says Jack Manley, executive director, global market strategist with J.P. Morgan Asset Management — ones that drown out the noise but let the signal through.

“There’s going to be a lot of headlines, a lot of policy change, a lot of volatility in things like GDP data, in things like inflation numbers,” he said on the latest episode of Soundbites. “Try to put some ear muffs on and hear through it. Because if you’re able to ignore a lot of that noise and really focus in on just the signal, you’re probably going to end up having a perfectly fine year from a portfolio performance perspective.”

Manley said three factors are likely to “move the needle” the most this year: the fiscal stimulus push being seen in developed markets, continued spending on artificial intelligence, and labour market strains.

Fiscal Stimulus

Manley said the Canadian government promised in its 2026 federal budget “a generational investment” on infrastructure and housing, defence and business incentives designed to spur private investment.

In the U.S., the so-called One Big Beautiful Bill promises sweeping tax cuts, an extension of 2017 tax breaks and government spending designed to stimulate growth.

“Fiscal stimulus is going to be a dominant force in 2026,” he said.

Artificial intelligence

Manley said more critical questions are starting to be asked about artificial intelligence, even as investment continues unabated.

“We are going to continue to be talking about artificial intelligence. That story continues to evolve, and The Magnificent Seven is still the engine of growth, but it is losing a bit of its lustre,” he said. “There’s a very good chance that investors start asking tougher, more critical questions of these companies.”

He suggested the hyper scalers — the large-scale cloud service providers that own and operate massive data centres — will have to start justifying the enormous capex being spent, despite minimal tangible returns.

Labour strains

“There’s been a pretty notable deceleration in the pace of job creation in both Canada and the U.S.,” Manley said. “I think the labour market is going to come, really, front and centre in 2026. That’s what the Street is ultimately going to be talking about.”

He said there are similar forces impacting the labour market in both Canada and the U.S. Those include an aging population, declining birth rates and an over-reliance on importing labour. And while immigration is a hot topic in both countries, the U.S. has the added pressure of significant policy shifts that involve voluntary and involuntary deportations, coupled with a significant slowdown in visa issuance.

The number one problem that these companies [small- and medium-sized businesses] are facing right now in the United States, is they cannot find high-quality, talented labour,” he said.

Notable sectors

Manley said he is keeping a close eye on a few sectors that will face big changes in 2026. Among them: health care, the financial industry and the artificial intelligence build-out.

“The one wild card for me is the energy sector,” he said.

With investment so closely tied to geopolitics, he said the direction of prices and profitability is extraordinarily volatile.

“Some really interesting distortions happening in the energy market right now make it almost a coin toss as to how that sector is going to perform next year,” he said.

With reference to the capture of Venezuelan president Nicolás Maduro and the U.S. government’s intention to direct Venezuelan oil production, Manley said the impacts may not be felt in the near term.

The country’s oil industry has endured decades of under-investment, a brain drain and a reduction in production capacity.

“Getting Venezuelan energy output up to levels that we saw, say, back in the ’60s, would require tens, if not hundreds, of billions of dollars of investment,” he said.

“That’s not to say we can’t see a meaningful increase in Venezuelan production, but it is to say [it] probably won’t happen overnight. It’ll likely take years, if not decades.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.