1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 116
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
To be clear, this does not imply that equities are destined to underperform in 2026 or that the
strong run of returns since 2023 is coming to an end. Historically, the S&P 500 has delivered
positive calendar‑year returns nearly 80% of the time since 1950, with 63% of those years posting
double‑digit gains. The index has recorded consecutive years of positive returns 44 times over
this period, and four‑year streaks of positive returns – what the index is aiming for in 2026 – have
occurred 20 times, suggesting that another positive year is a reasonable possibility.
However, when starting valuations are elevated, future outcomes become more asymmetric, with
downside risks dominating even if earnings growth remains solid. As such, despite a
fundamentally supportive backdrop, the combination of demanding valuation assumptions and
limited margin for error leads us to favour a neutral equity stance rather than a more aggressive
risk posture.
Fixed income as a portfolio stabilizer
Within this context, fixed income plays an increasingly important role as a ballast in diversified
portfolios. Building on the point above, when the S&P 500 has posted negative calendar year
returns (based on data going back to the early 1990s), global fixed income has outperformed by
an average of over 15%.
The attractiveness of fixed income has also improved in recent years, owing to the upturn in yields
which are currently close to their highest level in over 15 years. Starting yields are a key
determinant for future returns and imply a healthy outlook for fixed income ahead.
Yields are near their highest level in over 15 years, pointing to a healthy outlook for fixed
income
10-yr annualized returns
10%
8%
6%
4%
2%
We are here
0%
-2%
0%
2%
4%
6%
8%
10%
12%
Yield-to-worst
Source: Bloomberg Finance LP, Scotia Wealth Management
As mentioned above, we favour investment-grade corporates over high yield. While both
segments benefited from strong fundamentals in 2025, high yield carries a meaningfully higher
beta and tends to behave more like equities when spreads are tight. Indeed, although spreads
are tight for both segments of the credit market, they are relatively more stretched for high yield
than they are for investment grade.
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