1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 15
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
The benefits of these tried-and-true investing principles were on display with the White House’s
Liberation Day tariff announcement last April that pushed equity market volatility to its highest
level since the pandemic, causing the S&P 500 to register a double-digit decline in a matter of
days. Amidst rising trade policy uncertainty, the instinct for many might have been to run for the
hills. Yet, those who maintained investment discipline by not allowing short-lived disorder to
dictate decisions that would have long-term ramifications for portfolios were ultimately rewarded
when a recalibration in White House trade policy sparked a swift recovery and a >30% rally in the
S&P 500 from its post-Liberation Day trough as at 2025 end.
Markets staged a major comeback after the Liberation Day selloff, underscoring the
importance of staying invested
20%
Liberation Day
10%
0%
-10%
-20%
Jan 2025
Mar 2025
May 2025
Jul 2025
Sep 2025
Nov 2025
S&P 500 - price return
Source: Bloomberg Finance LP, Scotia Wealth Management
Despite the recovery and the corresponding easing in market volatility, we would not characterize
the current environment as “risk-on.” On the contrary, several catalysts could reignite bouts of
volatility through 2026. Although a recession is not our base case, global GDP growth will likely
continue to moderate with many economies running in excess supply. U.S.-China trade
negotiations are ongoing, and the upcoming USMCA framework review introduces another
potential point of friction. Markets are also contending with uncertainty around the pace of future
monetary policy easing, the scale of AI-related capital expenditures and whether future demand
justifies it, and equity market valuations that remain elevated relative to history. Earnings growth
expectations are healthy, but the margin for error is slim, raising the risk of valuation correction if
earnings results or corporate guidance fall short of expectations.
In this section, we will outline the key risks for investors to monitor in 2026 and beyond. Against
the backdrop of these risks, we believe investors should avoid excessive risk-taking in portfolios,
opting instead for a balanced exposure across the main asset classes. Corporate profits will likely
continue to rise, supported by positive, albeit below-trend economic growth that may serve as a
constructive backdrop for risk assets like equities but one that may not be without its fair share
of market volatility. Market volatility can be mitigated through exposure to assets with low
correlation to equities, such as fixed income and even alternative assets.
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