Our 2026 Outlook is for a positive year, despite USMCA renegotiation uncertainty

December 2025 Insights & Strategies

Macro Highlights for November

• The U.S. government shutdown has impacted the availability of official data, but our U.S. Economics team expects real GDP growth of 2.7% q/q (annualized) in 3Q25, slowing to 0.2% q/q (annualized) in 4Q25. Overall annual growth is expected to improve marginally from 1.8% in 2025 to 2.2% in 2026.
• Canadian real GDP rose at a 2.6% annualized pace in 3Q25, stronger than expected, although the underlying details point to a still fragile domestic backdrop, with weak spending from both consumers and businesses. Early estimates for October output suggest a weak start to 4Q25, leading into our expectation of full year growth of 1.2% in 2026.
• The unemployment rate in Canada dropped to a 16-month low in November, to 6.5%, from 6.9% in October and 7.1% in September, as 53.6k jobs were created in the last month. Gains were predominantly in part-time jobs (63k) and significantly improved the youth unemployment rate, which declined to 12.8% from 14.1%, while employment growth for core-age (25-54 yrs) workers was relatively unchanged. Although we are missing official data from the U.S., the expectation is that the unemployment rate has likely increased further from the 4.4% September figure.

Financial Markets in November

• In November, the TSX Composite gained 3.7% in price and 3.9% in total return, pushing its year-to-date performance to 26.9% and 30.0%, respectively. Materials, Consumer Staples, and Consumer Discretionary were the key contributors to performance, and the federal budget provided more hope of increased resource development in the country.
• The S&P 500 had a more difficult month, with a 0.1% price return and 0.2% total return, for year-to-date gains of 16.4% and 17.8%, respectively (in local currency). The tech-heavy index was pressured by concerns over high valuation multiples against the sustainability of A.I. spending and return of investment as investors also worried that the FOMC might stop easing interest rates.
• In Canada, the materials sector was a major contributor to TSX performance with a sharp rebound in November, supported by higher gold prices, a surge in silver, and gains in copper. The sector is closely aligned with several key initiatives and programs outlined in Budget 2025.

Upcoming

• Both the BoC and FOMC will update their policy interest rates on December 10. We expect the BoC to hold steady at 2.25%, the low end of its neutral range. While the BoC is indicating that it is comfortable at this level, we expect that a challenging 1H26, will prompt one or two more cuts next year. in the U.S., there is currently a 90%+ probability of the FOMC cutting by 0.25% to 3.75%, with expectations for further easing into 2026.
• All eyes will be on President Trump’s pick to chair the Federal Reserve as Jerome Powell’s term ends in May 2026. While the appointee will certainly be someone in favour of lower interest rates, the balance will be to nominate someone with enough credibility to satisfy financial markets. President Trump has most recently suggested that he has already made his decision and will announce his pick in early 2026. Speculation currently favours his previous (first term) National Economic Council Director Kevin Hassett.
• The most impactful event for Canada in 2026 will be the renegotiation of the USMCA, which we expected to be most active around mid-year. While we ultimately think the agreement is too important for both countries to be canceled outright, we do expect a lot of scrutiny on Canada’s supply management system, and broad tightening of rules of origin that will focus on blocking out goods from other countries, most notably China. While we expect a generally positive outcome that will lead to a sigh of relief and give businesses more confidence to invest in Canada in the latter half of the year, we should expect volatility, uncertainty and anxiety to permeate the negotiation period, with at least one threat from President Trump to completely cancel the deal.