Hi everyone! We are back with another episode of The Institutional Beat podcast, where we share interesting and relevant topics for institutional investors. My name is Hayley Hopwood, and I am your host for today's episode. I am very pleased to welcome my guest today, Eric Savoie, who is a senior investment strategist here at RBC Global Asset Management (RBC GAM). Welcome to the podcast, Eric.

Thanks, Haley. Thanks for having me.

So it's mid-December now. The end of 2025 is quickly approaching, which means it's time to take stock of what happened over this past year and start thinking about what we can expect from 2026. 2025 was interesting to say the least. It included some tariff-fueled trade tensions and a pretty explosive AI boom. But we're not here to talk about what was. We're here today to talk about what will be – and Eric, forecasting is something you live and breathe day in and day out. So I think you are the perfect guest to help us set the stage for 2026. No pressure.

Oh, thanks. Yeah. I mean, it's true that there's been a lot of risk in 2025. Maybe it might be helpful to just sort of remind people of what happened in 2025 as a setup for what we can expect in 2026. One of the key themes in 2025 is just that there was a lot of fear at the beginning of the year.

Of course, with tariffs as one of the key risks. And of course, there were other risks. Geopolitical tensions, there were flare-ups in the Middle East, and all sorts of things related to that. And also, the U.S. government shutdown – longest in history. And so there was no shortage of challenges facing the economy in 2025. And I think one of the things that stood out this year is that the economy managed to continue to expand.

And so we did not see a recession. And probably the worst-case outcomes people might have imagined at the beginning of the year did not play out. The economy's been especially resilient. Spending has held up in the U.S. and Canada. We expect economies to continue to grow into 2026 – and potentially even accelerate into 2026.

There’s a few tailwinds that will kick in next year that could potentially cause growth to be even a little bit better. We have rate cuts that have occurred in large part in 2025. But typically, there's a delayed effect on that 12-18 months following resumption of rate cuts. You start to see that acceleration in growth.

And then there's a lot of fiscal spending happening. Not just in Canada, but the U.S. with the One Big Beautiful Bill. Governments are running deficits all around the world. And so that that will be another source of a tailwind into 2026. We expect not tremendous growth next year, but perhaps a little bit better than this year. We see something like 1-3% real GDP growth, going into 2026, in Canada on the lower end and then a little bit stronger in the U.S.

Okay. Well, perfect. And that was actually my first question, Eric. So you beat me to the punch there. I was going to ask about the economy and economic growth. So that's perfect. But the other piece of that that I was going to ask you about is inflation. What are your expectations there when it comes to both Canada and the U.S.?

Yeah. So inflation is another one of those…it's been a little bit stubborn. A lot of economists are expecting inflation to come down, of course there's a wrench thrown into the mix with tariffs that causes an upward pressure on prices. And so we've seen a little bit of that in perhaps any sort of moderation in inflation that we would have expected to come about. Is it likely to just be pushed out later into 2026?

And so, you know, our view is that the impact from tariffs, and this I think is widely understood or sort of a consensus view that the tariff impact on inflation is sort of a one-time effect. Right? You impose a tariff, a company might raise their prices in response to that and they're not going to do that again the following year. At least we would not expect that to happen unless tariffs were to increase again at a similar pace to what they have. And that seems unlikely. And so, our view is that inflation will likely peak at some point in mid-2026 and then likely to moderate or calm into the second half of 2026. So we might see a little bit more inflation pressure at the beginning of the year. And nothing too extreme, like 2-3% inflation. And then our expectation is that moderates closer to that 2% level by the end of 2026.

Yeah. And fair to say, there's a little bit more of that inflation pressure in the U.S. compared to Canada, right? Because that tariff impact that you described is obviously pronounced in the U.S. and not as much as a feature here in Canada, especially given the removal of the counter tariffs that were in place, right?

That's exactly right. So you can think of the tariff as sort of an import tax, which is what it is. And so the US is the source of those tariffs. So they're the ones feeling the biggest impact of that import tax. To the extent that some of the countries have also done sort of a reciprocal tariff in response to that they will feel inflation.

But you're right. It'll be less pronounced in countries outside the U.S. And so our inflation forecast is highest in the U.S. and a little bit lower in other countries around the world.

Gotcha. Now just as you extend that out and you think about central banks, obviously they have to weigh both inflation as well as economic growth. And with inflation being a little bit stickier in the U.S., I think that puts the U.S. Federal Reserve (Fed) in a little bit of a tricky spot.

We just saw a rate cut yesterday from the Federal Reserve. We're recording this on December 11th, I should say. That was on December 10th. What are your expectations as we look into 2026 for the Fed? More rate cuts to come from here?

Yeah. So you're right. The Fed is in a very tricky spot at the moment. And they're one of the only central banks that actually has this dual mandate. So they're not just focused on price stability, but they're also focused on the other part of their mandate to ensure maximum employment. And so, at the moment those two pressures are sort of moving in opposite directions.

On the one hand, you have a little bit more inflation pressure. Inflation is above target. It's closer to 3%. The target’s 2%. But on the other side, the labour market has been softening. So we've been seeing a little bit of increase in the unemployment rate –  nothing too extreme. You've seen a little bit of a reduction in the average pace of job creation over the last several quarters.

And so when you take those two things together, the Fed can basically – they have one tool to manage those risks – which is setting the interest rate policy. In that environment, the Fed has communicated in the last several meetings, or the last several rate decisions, that they would prefer to favour, the softer labour market, or that’s sort of the priority for them at the moment.

And they were sort of acknowledge that inflation pressures are a little bit too high, but they recognize also that those pressures are temporary. And so they've decided that they would prefer to lower interest rates in that environment. So we've seen the Fed cut at each of the last three meetings – September, October, December – with a 25 basis point cut each time.

And then just yesterday, I think it was important to listen to the Fed's commentary. They effectively suggested that they don't feel the need to deliver any more rate cuts with any sort of urgency, at least is what I took away from it. They said, or Powell said, that they feel the rate is now at a neutral stance, or at least at the upper end of what they think neutral would be.

And so, you know, perhaps, from here, the speed of rate cuts is going to slow. They've already delivered some easing. It's not clear that significantly more easing needs to come, but our expectation would be that they still have room to cut a little bit more. And so we would expect two more rate cuts over the year ahead.

And that's what the market's pricing in at the moment. Of course, you know it's all going to come down to the data. And we've been missing a lot of data the last few months because of the government shutdown. And so we will get some update to the employment numbers and inflation over the next few weeks. And really, it all depends where that goes.

If the economy is softer, the Fed might cut more than two more times. But if inflation pressures really are stubborn and stick higher, then maybe they won't cut as much as what is currently priced. But that's our base case forecast at the moment: is 50 basis points further in cuts over the year ahead.

Okay. Perfect. Now you know the story in Canada is a bit different. Obviously, the Bank of Canada has made significant cuts already. And in fact, the talk now seems to be more about when are we going to see the next hike. What are GAM’s expectations here for the Bank of Canada?

Yeah. So the Bank of Canada, in contrast to the Fed, the Fed hasn't cut nearly as much as Bank of Canada. So the Bank of Canada has already cut and other central banks too have already delivered substantial easing so far this rate-cutting cycle. And among those central banks, the Bank of Canada is probably at the end of its rate-cutting journey, so it's not obvious that they would need to cut any further.

So if they're at the end of the rate-cutting journey. And that's our expectation as well, that no further cuts needed in Canada. And I think naturally the question comes up, okay, well, if the next move is not going to be a cut, then that means it must be a hike. So when will that next hike occur?

At the moment, the market is pricing in some possibility of a rate cut by the end of 2026. Of course, what's priced in is in constant flux. That’s still a long ways away. We’ll see what actually materializes by then. But our view is that Bank of Canada will be on hold for the entirety of the next 12 months.

So that's our view at the moment. I don't really see any reason as to why the Bank of Canada needs to hike at this point. But we'll see how the year progresses. Of course, if economies really bounce back and reaccelerate in a big way, and inflation pressures start mounting, then that could motivate central banks to need to respond to that.

But at the moment that that's not what we see. For 2026, we see inflation pressures calming. We see economic growth accelerating but not accelerating in a major way. And so in that environment, our expectations of Bank of Canada just stays on hold.

Okay. Yeah, that makes sense. Let's pivot to bond markets now. So yields seem pretty healthy. Ten year yield in Canada around 3.5%. And a little over 4% in the U.S. What would be your expectations for 2026 when it comes to bond yields?

We don't expect significant movement in bond yields over the year ahead. You're right to say they're at quite healthy levels. And in fact, they've been relatively stable. I mean there's been some short-term fluctuations. But if you look at sort of the past year in general, yields have been mostly sideways in the U.S. and Canada over the past year. In the U.S., trading closer to the lower end of its trading range over the past year. And there is some expectation with central banks easing that yields will have to come down. But there's really two other things that are sort of entering the picture that have limited any sustained decrease in bond yields. And one of those is just that inflation has been a little bit more stubborn. But the other one, which is the big piece, is there's been a lot of concern over government deficits. So governments have been spending a lot of money. They've been borrowing to finance that spending and governments are continuing to run fairly large deficits.

That has fixed income investors a little bit concerned about that. And so, what we're seeing happening within the fixed income market is some introduction of a risk premium attributed to that concern over poor fiscal health at the government level. We don't necessarily see that going away anytime soon. So even if some of our models might argue for yields falling over the year ahead, we think that concern over fiscal health will likely limit sort of any sort of decrease in yields.

Over the year ahead, we expect roughly unchanged yields in Canada and the U.S. So that would provide government fixed income investors somewhat of a coupon or cash-like return over the year ahead. Something low single digits would be our expectation for government bonds.

Okay. Yeah, certainly. But also likely with a lot of volatility along the way, right? Still lots of risks and uncertainty in markets, which generally seem a little bit more jittery these days in response to data releases and the like.

Yeah. That’s fair.

All right. Perfect. Well, before we get to the main event, which is of course equities, can we talk a little bit about FX. So the U.S. dollar has weakened over the course of the year against most global currencies, including the Canadian dollar, although not to a significant extent against the CAD. Is this weakening U.S. dollar a trend that you expect to persist into 2026?

Yes. In fact, is probably one of our biggest conviction views here in terms of the broader RBC Investment Strategy Committee. It’s that the U.S. dollar has likely entered sort of a longer-term bear market cycle. And so you're right that the U.S. dollar has come a little bit off over the last several quarters.

Typically, if you look at sort of the very long history of the U.S. dollar cycles, sort of like a 50-plus year view, you notice this pattern of very long fluctuations in the price that's been anywhere from 5-7 years. And so, we think we're in just that sort of the beginning stages of a longer-term U.S. dollar decline that could potentially last 5-7 years or at least several years. And we're just a few quarters into that. And so, yes, our view is that you would see the U.S. dollar continue to decline. Part of the reasons for that is just the U.S. dollar is extremely expensive at the moment. It's about 20% overvalued, according to our models that we look at, using purchasing power parity as a guideline for that.

And then with the Fed, turning to easing mode, or resuming interest rates cuts in September, the interest rate differential between the U.S. and the rest of the world is expected to narrow. And so that takes a little bit of impetus out, or excitement out of the U.S dollar, in that environment. So for those reasons. We also see economic growth being fairly robust in the rest of the world. And so no longer would you have this expectation that the U.S. would be very strong in the rest of the world quite weak. If that converges back and you get less of a difference or less of an advantage in the U.S. versus the rest of the world, we could see that weighing on the dollar.

Our forecast for a year from now is 132 on the U.S. dollar CAD, versus around 138 at the moment. And so we expect a little bit more depreciation of the U.S. dollar relative to the Canadian dollar over the year ahead.

Okay. Perfect. Well, now let's shift gears to what I suspect a lot of people are interested in hearing about, which is equity markets. And I think we've got to start with the S&P 500. You know, we obviously saw that pretty significant sell-off back in April following Liberation Day. But the bounce back from that has been pretty incredible.

And in large part that's been driven by AI-related stocks, although other areas have done well as well. But can this momentum continue for the S&P 500?

Yeah. That's right. It's been a remarkable year for the stock market this year, I think. One of the things I've been saying is if you would rewind the tape back to the beginning of the year and you would have told me all the things that would have happened this year, all the risks that would have surfaced – tariffs, government shutdown, geopolitical risk and whatnot. And then if you would have argued that the S&P would be up 15% in that year. There's no way I would have believed that. But here we are S&P that 15, 16% year to date. A very strong rebound off the lows for sure. A lot of that is AI-related stocks. But it's not just that – we are seeing some breadth to those gains.

But from this point going forward, we're starting from a point where the S&P is historically very expensive. Optimism is quite elevated. Various indicators of investor sentiment are basically at extremes at this point. The reason for that is the outlook for corporate profits is quite positive. Profits have grown something like 14% this year. So very strong. The fundamental picture is very robust in the U.S. and it's expected to continue into next year. The expectation for profit growth for 2026 is another 14% increase from today. So the outlook is very positive. The only thing is that a lot of that positivity is already baked in or priced into the stocks today.

The demand is very high on that outcome. And the success of the S&P is increasingly dependent on that positive story playing out. There's really not much room for error. And then the other thing is, yes, you're right, a lot of the growth has been AI-related. If you look at the concentration...the S&P 500 is so concentrated at this point, it's the most concentrated it's ever been.

About 35 or 36% of the index weight is just the Magnificent Seven. So the 493 remaining companies make up two thirds of the index. That's very concentrated. The top ten stocks are about 40% of the index. So, there's a lot riding on just that very narrow set of stocks that are extremely large, extremely successful. When we look at this…the starting point of the picture and we look at various scenarios, we recognize that the upside seems fairly limited from here versus the risk of the potential downside if things were to disappoint.

But we also recognize that the positive story could continue to play out. AI as a theme could continue to materialize. It could lead to significant earnings growth, significant margin expansion. That's something that we've seen as well this year as profit margins have continued to expand. You know, there's a few reasons for that. One is that interest rates have been coming down, which helps corporate profitability. But the other piece is this AI theme. And it's not just the AI benefitting the AI companies themselves, it's the benefits of AI spreading all across to other companies. Walmart, Starbucks, or whatever have you – those companies are able to incorporate AI into their business models, either to reduce costs or to boost productivity.

And in doing so, they're able to boost their profit margins. And so the expectation, at least if we look at the consensus of analysts’ estimates, is looking for a further one percentage point increase in profit margins, which translates to about a 7-8% tailwind for profits, in addition to the revenue growth that you would get.

If you just do the simple math, you get to say 4 or 5% revenue growth next year, then you add that profit margin expansion tailwind to that. That's how you get to your sort of 12-13 or 14% earnings growth next year, which could continue to support the stock market. But that's in comparison to a very strong year that we had this year, it's hard to imagine that that repeats again next year.

And so we would say, we continue to expect the stock market to go up next year, but maybe reduce those expectations from double digit growth to single digit growth next year. Our forecast for the S&P is something closer to 5 or 6% return in 2026, which is still healthy. But just recognizing that that upside potential is limited by the fact that we are starting at such an elevated valuation point today.

Yeah. And I think the story, though, is a little bit different when we look outside of the U.S. Obviously you don't have those massive mega-cap stocks dominating. But other markets have also been incredibly strong over the course of this year. But what about international equities? Are valuations still looking compelling internationally?

Yeah. So that's right. Actually the big theme – even though a lot of investors focus on the S&P for having delivered very strong returns this year, around 15 or 16% – the real story is that the international markets have done far better than that.

Look around the world – the European equities, emerging market equities. We're seeing numbers year to date in the 24-25% level, 30% for Canada. And this is in U.S. dollar terms. So part of that is a lot of those markets began from points that where valuations were very appealing, very cheap in some regions.

And we still see valuations that are quite compelling in some parts of the market. So I think when investors focus a lot on the S&P, they might conclude that, ‘Oh the stock market is overvalued.’ So shy away from stocks. But that's not what we see.

If we look more globally, our view is that the global equity market is much more reasonably priced. And if you look in markets like Europe or emerging markets, for example, you continue to see stocks in those regions trading at close to one standard deviation below fair value according to our own modeling. And so there's a lot of room for those markets to continue to appreciate – not just from positive earnings momentum, but from valuation re-rating up to something that's more normal in the context of history.

So we feel like there's – when I just said that the return potential might be limited in the U.S. – yes, that's the case for the U.S. and even to a certain extent, Canada. But stepping outside of that, we see still pretty good return potential in some of those other regions, maybe closer to high single digits, call it 8 or 9% in Europe, in emerging markets versus a mid-single digit return expectation for the U.S.

Okay. Perfect. And you mentioned Canada there obviously, but you mentioned perhaps not as high expectations there. What if you were to put a number on it for Canada? What would that be?

So Canada is also getting, you know, it's had a really strong run this year, and so it's starting to get expensive as well. It's looking pretty stretched in the context of our own models. It's closer to the sort of the upper extreme when we compare its valuation to history. A lot of the big move or a lot of what was driving Canada is gold.

But it's not just that. There's been pretty good growth across the board, but gold's been a major driver of the index so far this year. And so again, just because the valuation starting point, when we do the math and look at the different scenarios, our base case expectation for the TSX for the year ahead would be something like 5%, 5-6% call it. So, more or less in line with the S&P, but in both those markets, less than what we would expect, for international markets.

Right. Gotcha. Okay. So you touched on gold. You mentioned gold there as being a big driver in the TSX. And I realize that you don't specialize – you don't focus on commodities –  that's not an area that you look at on a day-to-day basis. But gold and also oil prices, have been quite topical over the past year, with gold up in the vicinity of 60% and oil down around 18%. Do you have any views or tidbits that you can share or what we might expect there over the next year?

Sure. Yeah. The gold move has been remarkable, for sure. And of course, a lot of people are talking about it. There's been a few drivers for the very strong move in gold so far this year. Central banks have been buying a lot of gold in this environment.

So that's been a tailwind. There's a lot been a lot of concern about inflation that's helped the price as well. And then all this concern about government debt, which I mentioned in the fixed income market, also is translating to providing some support for gold. So yes, it is up around 60% year to date. And it's up about 300% since 2015.

So, a very strong move. The question is, can it continue? Well, I mean, it certainly could continue. If we look at historical gold runs, they have run somewhere in the range of 500-600% that time. So, you know, if we compare it to that, you can get quite excited or bullish about the fact that while it was only up 300% in this move, it can certainly go up a lot more.

And so, I think anything is possible with gold. There's a lot of speculation embedded in the price as well. But I would just point out that if sort of any of that narrative were to shift, you could see quite a bit of volatility just given the extent of the move that we've seen so far.

But I'm reluctant to give any sort of forecasts on the price. That's not really my area of expertise, specifically.

Totally fair.

On oil, I think the story on oil, at least from what I understand from some of the things I'm watching there: Yes, oil prices has come down a lot. It's not that there's a lack of demand for oil. We're looking at the sort of the demand or the consumption of oil that's still rising at a fairly steady pace.

What's happened this year is you’ve just seen a significant increase in oil supply,  whether it's OPEC countries or even Canada, which has been boosting supply. And as a result, at the moment you have a little bit of a supply-demand mismatch. You just have more oil being produced than is being consumed. And as a result, it's weighing on the price.

It's not to say that that oil companies or energy companies are not making money in this environment, because if you look at the energy stocks within the TSX, they're up 14 or 15% this year. So that's a pretty remarkable outcome. You would have thought maybe those stocks move more closely in line with the price of oil, but it's not doing that this year.

And I think maybe what could happen going forward to sort of support the price is if that supply-demand imbalance moves closer into balance. So that would be, you know, demand is expected to continue growing, but if supply were to just taper off a little bit and get those numbers into better balance, you could see support for the oil price going forward.

Again, I'm not going to make any sort of dollar price forecast on that price, but those are some of the moving parts.

Well, I appreciate you giving your perspectives, even though it is not your area of expertise. Okay. Well, before we go, Eric, I know you also sit on the asset mix committee here at RBC GAM. Can you just highlight quickly for us what we're doing in terms of asset mix to start off the new year?

Yeah. So, just for context, the asset mix that we manage or that we publish in our global investment outlook is our asset mix relative to a balanced portfolio, which has a neutral allocation of 60% stocks, 38% bonds, and 2% cash. At the moment, our recommended asset mix in this environment is fairly close to that neutral position. We're running with a slight overweight to stock, so call it a slight ‘risk on’ position. We have 61% equities relative to that 60 neutral. And that's been funded from fixed income, so fixed income is slightly underweight at 37 versus that 38 neutral. This is a slight change versus what we had a quarter ago. We were at 62% equities. And we've dialed that down a little bit.

We've reduced our risk just slightly. Part of that is acknowledging the fact that stock markets have had a very good run, that valuations have expanded to points where sort of that risk-reward is maybe a little bit less appealing. At this moment, not enough to entirely want us to eliminate that equity overweight position, but we think it's appropriate to reduce it.

The other thing that that we've done within that asset allocation from a regional perspective is we've been tilting towards international markets away from North America within our regional equity mix. And so, we favour Europe, emerging markets, Japan, and those equity regions and less so the U.S. and even a little bit Canada.

But mostly the underweight from a regional perspective has been the U.S. this quarter, or at least going into 2026. We've actually decided to narrow that underweight in the U.S. and Canada. So we've sort of tilted those regional moves – we've tilted them or we've brought them back closer into line, closer to neutral, although still a little tilted to international.

One of the reasons we did that is that we didn't want to be too underexposed to the U.S. market, and we recognize that there's a lot of momentum in these big-cap technology companies. We recognize that these are very successful companies, despite the fact that they're very expensive. And, you know, we recognize that if that AI theme continues to play out, those companies could stand to benefit.

And we just don't want to be too underexposed to that part of the market. So going forward for 2026, we think we're well positioned to take advantage of any sort of volatility should it present itself and allow us to reallocate those positions. Sitting at closer to a neutral position, I think, gives us that flexibility should the market be so kind to give us an opportunity to take advantage of that.

Yeah. For sure. Okay. Well, I mean, I think overall, based on the comments that you've shared today, it's fair to say your outlook for 2026 is cautiously optimistic. Is that appropriate?

I think that's appropriate. Well, I would say it's fairly optimistic from a fundamental standpoint, but then recognizing that a lot of that optimism is already priced in, leaving not as much more room on the upside to benefit from that. That's how I would frame it.

Gotcha. Perfect. Okay. Well, Eric, thank you so much for being on the podcast today and sharing your insights. Really appreciate you taking the time.

Sure. It was a pleasure. Thanks for having me.

Yeah. Of course. And I guess, we can check back in next year and see how you did there with your forecasts.

Oh for sure. I’d love to do that.

Or maybe not. Forecasting is not a precise science after all.

Okay. I do also want to say a big thank you to everyone listening on the podcast today. If you want to learn more about RBC Global Asset Management's expectations for 2026, you can check out our latest publication of the Global Investment Outlook, which Eric mentioned a little bit earlier.

And this is a document that Eric is actually quite a large contributor to, and it's something that's available to everyone on our website. So that's all we've got for today. Happy New Year.

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