The global economic expansion has decelerated in the face of several macro challenges. Elevated policy uncertainty, tariffs, and the longest U.S. government shutdown in history have weighed on consumer sentiment but, importantly, leading indicators remain at levels consistent with a sluggish economic expansion rather than recession (Exhibit 1).

The economy has so far been resilient and, with the government now re-opened after a 43-day hiatus, any lost economic output related to the shutdown stands to be recaptured over the coming months. Furthermore, tailwinds from the One Big Beautiful Bill and lower interest rates mean that odds, in our view, favour a slight acceleration in growth going into 2026.

Key risks to our outlook: tariffs, indebted governments, private credit

Tariffs remain a key risk to the economic outlook as negotiations are highly fluid and subject to change with little notice. More recently, though, there has been some relief on the trade front, as the U.S. struck a deal with China and Trump lowered tariff rates on a variety of food categories. Other risks include highly indebted governments that plan to boost deficits through fiscal stimulus and signs of stress in private credit markets that have come to light with the collapse of First Brands and Tricolor. These incidents appear isolated so far, but concerns surrounding private credit, should they intensify, could be a source of volatility for financial markets over the quarters ahead.

Exhibit 1: Global purchasing managers’ indices

Source: Macrobond, RBC GAM

Fed resumes interest-rate cuts to support softening labour market

Against this backdrop, the U.S. Federal Reserve (Fed) resumed interest-rate cuts, with 25-basis point reductions at each of the September and October decisions. Future interest-rate cuts are not guaranteed, though, given that the two elements of the Fed’s dual mandate – maximum employment and price stability – are moving in opposite directions. The labour market has softened but U.S. CPI inflation, at 3.0%, remains above the 2.0% target (exhibits 2 and 3). That said, Fed Chair Powell has emphasized that the softening labour market would take priority over slightly above-target inflation readings in determining the path for interest rates going forward. The futures market is pricing in at least 75 basis points in U.S. rate cuts over the year ahead, with the next cut likely taking place on December 10, 2025, in line with our base case scenario (Exhibit 4).

Exhibit 2: United States

Monthly change in non-farm employment (3mma)

Note: As of Sep 2025. 3mma = 3-month moving average. Source: Bureau of Labor Statistics

Exhibit 3: U.S. inflation

Personal Consumption Expenditures Price Index

Note: As of Aug 2025. Source: Bloomberg, RBC GAM

Exhibit 4: Implied fed funds rate

12-months futures contracts

Source: Bloomberg, U.S. Federal Reserve, RBC GAM

Sovereign bonds traded in narrow range, models suggest cash-like returns

Government bond yields have fluctuated in a relatively narrow range over the past year as investors weighed easier monetary policy against increased government spending and firmer inflation. The U.S. 10-year yield traded between 3.9% and 4.8%, settling closer to the lower end of that range around 4.00% in late November (Exhibit 5). But yields are close to the upper end of their 12-month trading range in Germany and, in Japan where the central bank has been raising interest rates and new prime minister Takaichi announced increased fiscal spending, yields have been trending persistently higher from a lower base (Exhibit 6). At current levels, our models suggest sovereign bonds offer at least cash-like return potential with only modest valuation risk as long as inflation pressures remain modest and government deficits can be managed.

Exhibit 5: U.S. 10-year T-bond yield

Equilibrium range

Note: As of November 30, 2025. Source: RBC GAM

Exhibit 6: Japan 10-year bond yield

Equilibrium range

Note: As of November 30, 2025. Source: RBC GAM

Stocks stage impressive rally but pockets of attractive value remain

Global equities climbed to fresh records during the past quarter as investors embraced risk-taking amid easier monetary conditions, strong corporate profits and optimism around the benefits of artificial intelligence. So far this year, the S&P 500 rose 16.4% and the tech-heavy NASDAQ outperformed with a gain of 21.0% as of November 30, 2025 (Exhibit 7). Less expensive global equities performed even better, with major equity indices in Europe, emerging markets and Canada up 24% to 31% this year in U.S. dollars.

The strong rally has made stocks more expensive, and our global composite of equity-market valuations situates stocks at about 14% above fair value (Exhibit 8). That said, the bulk of that overvaluation is contained within the U.S. large-cap growth space, while regions outside North America, particularly in Europe and emerging markets, continue to offer appealing upside potential.

Exhibit 7: Major indices’ price change in USD

2025 year-to-date

Note: As of November 28, 2025. Magnificent 7 includes Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. Source: Bloomberg, RBC GAM

Exhibit 8: Global stock market composite

Equity market indexes relative to equilibrium

Note: As of November 28, 2025. Source: RBC GAM

Strong corporate-profit backdrop is reflected in demanding S&P 500 valuations

The S&P 500 is one of the most expensive major markets, but its premium may be justified by its ability to generate rapid profit growth. Earnings have risen 14.7% versus a year ago with 83% of companies exceeding analysts’ estimates in the third quarter (Exhibit 9). As a result, analysts have been upgrading their forecasts for the year ahead and expect S&P 500 profits to grow another 14.3% in 2026 (Exhibit 10). One of the ways that profits could continue delivering double-digit growth amid low-single-digit economic growth is through the expansion of profit margins, helped by the benefits of artificial intelligence and declining borrowing costs. That said, with the S&P 500 trading more than one standard deviation above our modelled estimate of fair value, sustaining strong profit gains as well as maintaining heightened investor confidence are both critical to generating further upside in U.S. large-cap stocks (Exhibit 11).

Exhibit 9: S&P 500 companies reporting results above consensus forecasts

Note: As of November 28, 2025. Source: Refinitiv

Exhibit 10: S&P 500 Index

Consensus earnings estimates

Note: As of November 28, 2025. Source: Bloomberg, RBC GAM

Exhibit 11: S&P 500 equilibrium

Normalized earnings & valuations

Source: RBC GAM

Asset mix: trimming equity overweight, placing proceeds to cash

Our asset allocation reflects the balance of risks and opportunities. In our base case scenario, the economy continues to grow at a modest pace and inflation remains well enough contained to allow the Fed to continue reducing interest rates at a gradual pace. In an environment where corporate profits continue growing, stocks offer superior return potential versus bonds, especially in international regions where valuations are relatively more appealing. We acknowledge that stocks have had a strong run, that valuations in U.S. large-cap stocks are highly demanding, and that a variety of technical and sentiment indicators suggest stocks are stretched in the near term. As a result, we narrowed our equity overweight position by one percentage point during the quarter and moved the proceeds to cash, bringing our allocation closer to a neutral setting, which we believe is well-positioned to take advantage of opportunities should they arise. Our current recommended asset mix for a global balanced investor is 61.0% equities (strategic: “neutral”: 60%), 37.0% bonds (strategic “neutral”: 38%) and 2.0% in cash (Exhibit 12).

Exhibit 12: Recommended asset mix

RBC GAM Investment Strategy Committee

Note: As of December 2, 2025. Source: RBC GAM