Hello and welcome to the monthly Economic Webcast for March 2026. My name is Eric Lascelles, I'm the chief economist and head of investment strategy research for RBC Global Asset Management. I’m very pleased to share with you our latest thinking from an economic and from a market standpoint.

If you'd asked me a couple of weeks ago, I might have guessed this title would say something about tariffs overturned by the Supreme Court. That is still relevant.

We will still get to that. But a lot of other things are happening that have sort of occupied our attention and markets as well. And so I suppose the title appropriately has gone elsewhere. Iran in focus is one element of this. As I'm recording these words on March 2nd, it should be noted, we're just a day or two out from the U.S. attack on Iran.

We'll talk about the implications there. Similarly, there have been very clear worries expressed about artificial intelligence in recent weeks, with software stocks down and some concerns about a dystopian sort of outcome as a possibility. We'll work through that as well, among other things.

Okay, let's jump our way in. And as always, we begin with something of a report card, and I'll just leap my way into the positive side of that report card –

Report card: Some of the good things happening, the positive themes. And so let's run through those. The first would just be IEEPA tariffs. If you're not familiar with these acronyms, that is really a reference to one type of U.S. tariff. It’s the blanket tariffs that were applied to a lot of countries. So not a sector tariff, but a blanket tariff.

And so a lot of the 15% and 20% numbers that were thrown around late last summer. And so those IEEPA tariffs were overturned by the U.S. Supreme Court. Now, the White House has since introduced something else. We'll talk about that a bit later. On the net, the average tariff rate is a bit lower temporarily.

And we'll see where it goes from there. I can say from a stock market standpoint, one very interesting thing happening recently is this very clear rotation in equity leadership. And so what we're saying there is, of course, for a very, very long time, the tech sector was the very clear leader. And it's shown some some softness recently. Conversely, we're seeing some traditionally more defensive sectors actually start to perform now. That includes consumer staples as one.

I can mention as well, the energy sector has been doing well even before Iranian events. And so a number of other sectors taking the lead. Those with perhaps a pessimistic inclination would say, well, the thing that's been driving markets, that big tech sector, isn't driving it anymore. That doesn't sound so great.

That's fair. However, the counterpoint would be this was a very narrow market rally for an extended period of time. And classically, when you see that market movement broadened out and some of the under-loved sectors start to get going, often that creates a new leg for the stock market to continue rising. And I would say that we're actually a little bit more sympathetic to that side – as much as we're all watching alertly as this rotation seemingly takes place. I can say that from an economic standpoint, the economic data remains solid, looking pretty decent, not a cause for concern. Right now, to the extent markets have been choppy, it's not really on the basis of any immediate economic concern.

And then, of course, just to remind you – and this is something we've been pounding the table on for quite a number of months – but we do see, we think, some important growth tailwinds for 2026. And they include central banks that either are cutting rates or have been cutting rates with a lagged benefit and fiscal stimulus, and capital expenditures into artificial intelligence and maybe even a bit of extra productivity growth from artificial intelligence. And so we're feeling still pretty good about the 2026 growth outlook, even as we now grapple with some negative challenges and deal with things like Iran and deal with things like concerns about artificial intelligence.

Indeed, I'm now stealing my thunder here. Let's get into the negative themes. And so, number one, and certainly number one from a timeliness perspective (you could debate whether it's the most important thing on this list). But number one would be, of course, war with Iran. And this is fairly serious, and it's proven even a bit more intense than the guessing had been going into this.

I'll speak at length about this in just a moment. Similarly, that other concern I've mentioned a few times now is just artificial intelligence, exciting, remarkable, making money for chipmakers, potentially set to make money for those developing models. But there are some downsides. And the downsides kind of arrive on a few levels.

And so one level would just be companies that are disrupted by artificial intelligence. And so that's one consideration. And the other one is just concern that artificial intelligence could be so remarkable that it disrupts labour and workers and does really bad things to the average person and to the economy more generally. And so let's talk about that.

That's certainly not the way it has to go. There are a number of scenarios, even if you think this is an enormous technological revolution. But nevertheless, those worries have become more visible. And we've seen software stocks going down as one of the maybe more easily disrupted sectors given that you see AI quite handily generating computer code and even testing it, and revising it, in real time.

Right now we are seeing more generally some market concerns.

And so, the AI scare trade really is software stocks going down, thinking that they could be significantly disrupted. Their moats have been substantially reduced. We've seen regional banks wobble a little bit in the U.S. And so in part just exposure to private credit and part exposure to AI lending, and so on. We've seen private credit underperform. A lot of that also is a lot of lending happening to software companies.

Same with leveraged loans. Credit spreads inching a bit wider on that concern, though, as I'll show a bit later, still looking reasonably good and actually not really much wider at all post attack on Iran. Whereas you might have thought that would happen. And then similarly, of course, oil prices have surged recently and that's great if you’re an energy company.

It's generally less great if you're just about anybody else. And so that's another source of market concern right now. And so the market’s paying close attention, it should be said.

And so there are some pivotal decisions to be made here. And we'll talk through each of these forces in turn. And then stepping back – and this is not a comment from the last 3 or 4 days – unlike seemingly almost everything else.

But there has been a real loss of trust in the U.S. Maybe that's accelerated in some ways based on recent actions or not. But surveys now show quite clearly that the rest of the world isn't as big a fan of the U.S. as in the past, which just fits into the declining U.S. exceptionalism story.

And then just on the interesting side of the ledger, just around this table of contents of sorts, our report card, just to emphasize there are a lot of different ways artificial intelligence could go.

I'm going to show you a chart that gives you some of our thinking on that a bit later, but it might be a small deal, might be a big deal, might be an enormous deal. If it's an enormous deal, is it really, really bad or really, really good or somewhere in the middle? There are a number of ways this could still go.

We'll talk a little bit about electricity as a constraint on artificial intelligence. Is there enough power to power the data centres to get these models where they would like to go?

We'll talk a little bit at the end, just from a market perspective, about how stock market earnings are looking really good and conceivably set to grow quite nicely.

Stock market valuations are a bit expensive. So there's a tug of war that exists there. And then similarly we'll talk about economic regimes and what that means for markets as well. I'm actually regretting not having put this in the positive things, because actually the current economic regime, in theory, could be reasonably favorable toward markets. Okay.

So there's your big overview. Let's just jump right in. Where else to start but with Iran, I suppose, Iranian developments, on a number of fronts here.

Iranian developments:  So the first would be just stating the obvious and recognizing that I'm making these comments again on March 2nd. So things may yet change from here. But, as it stands right now, the U.S. and Israel, one might say, is at war with Iran.

And this is indeed more intense than what happened in June of 2025. You recall there were some surgical strikes then from the U.S. and Israel. And there were, there was a fairly limited retaliation from Iran. This time around, the Iranian retaliation is also larger. And there is a debate and the debate is, okay, what is the endgame here?

Are we going to see regime change in Iran, are they going to come out of this as a friend to the rest of the world and without sanctions, and with a democratic government or some variation on that? Or is there going to be political chaos as different factions vie for power, perhaps unsuccessfully?

Or is it status quo? Is it still going to be an ayatollah, and or a Revolutionary Guard and the sort of policies and preferences they've expressed in the past? And I think going into this, if you'd asked us a week ago, we would have said, well, we expect there to be an attack. We were saying it was more likely than the market thought.

That proved to be correct. But we would have said, well, status quo probably is still the outcome here. And so nuclear ambitions suffer some setback in Iran. But on the net, probably not a new government or not a profound change in direction. That is still probably the most likely outcome, but it's less likely than it was.

Regime change is clearly on the table to the extent that it's been explicitly advocated by the U.S., to the extent the head of state has been killed. And I believe the head of the Revolutionary Guard has as well. And so the regime change odds have gone up, the political chaos odds have gone up as well.

The status quo odds have gone down. But I would probably still say something not too different from status quo, in terms of the outcome. That is the assumption. Unless you were to see a real big shift and boots on the ground from a U.S. perspective, or otherwise, or perhaps other Middle Eastern powers who have also been bombed recently and certainly not pleased about it and perhaps increasingly inclined to retaliate against Iran as well, unless they were inclined to do something similar.

And so it may be hard to impose a full sort of regime change–type outcome.

The question then is what is the impact on oil? Obviously, oil’s in focus, just because from a Middle Eastern perspective, the globally economically relevant variable tends to be the price of oil. And so to no one’s surprise, the price of oil has gone up.

It hasn't gone up as much as you might have thought. Brent crude has gone from $70 a barrel to about $77. West Texas Intermediate is a bit lower but is up about $7 as well. Maybe that's understating things just because the price of oil did rise markedly in January and February, to some extent anticipating these sorts of outcomes because this was an open secret that the U.S. was sending a second aircraft carrier and had plans to help protesters and so on.

So perhaps it's fair to describe the price increases maybe in the range of $15 a barrel or something like that. And so the question is where does it go from here?

And so a big part of that answer is, of course, whether there is regime change and so on and whether sanctions are lifted. In a perfect scenario, you could talk about sanctions being lifted and Iran several years from now producing much more oil and the price of oil being much lower.

And that being a big boost to global growth and very helpful from an inflation standpoint. But it's probably not the most likely scenario right now.

If Iran manages to significantly and enduringly block the Strait of Hormuz, through which 20% of the world's oil and gas flow, that's a problem that would argue that oil prices need to go even higher.

Right now, the presumption is that some oil supply can still trickle through. Certainly, incentives are aligned with the other major Middle Eastern oil powers to accomplish that. The fact that the U.S. presence is so significant and the attacks are so unrestrained would suggest that Iran may not be able to fully block it. But there are X factors here.

And so one would just be drone technology has advanced in such a way that it's difficult to make intelligent comments about what can and can't be done. And it's certainly notable that Yemen, via missiles and drones, was capable of very much disrupting the flow of tankers and ships that were trying to transit through to the Suez Canal in recent years.

And a lot of that was using Iranian technology. And so it's not impossible that the Strait of Hormuz is ultimately at least partially blocked or rendered much more complicated.

The other twist for oil is just that Iran is also capable of targeting, and indeed now has targeted some of the refineries in the Middle East – essentially disrupting the supply of oil, not via the transportation of it, but via the extraction or the refinement of it as well.

So there are some real question marks that exist here. Inventory levels are fairly ample across much of the world right now. We are seeing other OPEC members and probably realistically mostly Saudi Arabia commit to producing some additional oil. And so I don't think we need to see oil prices surging into the triple digits and staying there.

Nevertheless, it probably does make sense that oil prices are higher than they were before in this context, even if you are somewhat constructive – and we are assuming that ships do manage to transit, if imperfectly through that Strait of Hormuz. And so the oil impact is significant and consequential and has economic implications.

And so just to shift to that subject, the global economy in theory is modestly hurt by these developments.

We ran our models to look at a $15 increase in the price of oil – which, again, is probably roughly where we've been since January, February. And so the global economy is modestly hurt. It depends who you're talking about. The Canadian economy, in theory, is a little bit stronger because it produces a lot of oil and exports it.

For the U.S. economy, in theory, it’s actually about a neutral impact. The U.S. is now an energy powerhouse in and of itself. If you made me pick a direction. I'd say negative, but not a big negative. And then you look at the likes of Japan and Europe and China and some of the other big energy consumers.

In theory, their economies are 0.2%, 0.3%, 0.4% smaller than they would otherwise be if this is a forever increase in the price of oil. We're not convinced it's a forever increase, but it nevertheless gives you some sense for the damage. It’s unfortunate, undesirable, not a killer blow, not a not an automatic recession -- at least not at this kind of oil price that we now find ourselves at.

And I would note that a very large fraction of the oil that goes through the Strait of Hormuz finds its way to China. So you could say China is perhaps disproportionately affected. India is a significant amount as well. The U.S., almost none. Just to put a bit of context into that, do note though, that whereas the economic implications are quite mixed, the inflation implications are maybe not universal, but more similar across countries.

Whether you're an oil producer or not, and Canada is and the U.S. is, in the end the price of oil is still higher for consumers. And so you still expect to see inflation a bit higher – and it's inflation that could be 0.3 or 0.4% higher. So, not perfect, not ideal at a time that we're looking for inflation ideally to trend downwards closer to 2%.

Suggests again, if this sticks – and it may not – inflation could be in the high twos. And sooner than that twos might be the way to think about this. You might think, therefore, that central banks need to raise rates. In general, central banks probably don't. Central banks often look through exogenous shocks, one-time price shifts, to inflation. They will be at least as attuned to the fact that economies are a bit weaker.

And so again, not to say therefore rate cuts happen, but I can say when you run this through models, the models actually are usually more sympathetic to rate cuts than hikes. I think in practice probably no big change on that front.

Finally that brings us into markets. And so what, should we think from a market standpoint?

And so the implications for bond yields are quite mixed. You can see kind of the risk aversion or just the bad news associated with conflict in the world would suggest that bonds should rally and yields should be lower. In practice we've actually seen yields a bit higher. And indeed there is a mixed impact because there is another variable to think about.

And so at least one of those variables is just that inflation will be a bit hotter. And so bond yields need to be a bit higher to reflect that. Markets could be pricing in rate hikes from central banks, as much as we would push back against that. So I would say mixed on the bond yield side.

For stocks, on the net, it’s bad news. Never good to have war in any kind of sense, I think. Nevertheless, it’s particularly bad for airlines with large fraction of expenses that are fuel. And trucking, a similar sort of story, and consumers and so not a dissimilar set up there. The consumer is a bit poorer just from more of their money going to pay for gas and so on.

Industrials are energy intensive too. Conversely, of course, energy producers and related sector, do just do just fine.

I'm going to show you a table in a couple of slides. It's notable that historically, actually market reactions to geopolitical events like this tend to be surprisingly small. And surprisingly short lived. I think we shouldn't forget that. It's not unusual for a few weeks from now or a month from now to be right back to where we started off. The market response, actually, in the stock market's been actually pretty small.

I've seen a significant rebound in fact, to some extent. And so, that’s more consistent with historical norm than you might think. It's rare that these are inflection points that persist for long periods of time. Maybe the one concession to be made or the one point to be made should it be a bit more lasting is just it does make sense for there to be some geopolitical risk premium in the world right now.

This is a power-based order. It is a more dangerous world. We've banged the drum on that quite a number of times in recent quarters. It's just worth remembering that. It’s another example of that, as was Venezuela, as some other events have been, Russia, Ukraine, and so on. And so, you know, all else equal, maybe it does make sense for the U.S. dollar to decline over time – but maybe not to decline by quite as much as you would otherwise think, because it is a safe haven, and safe havens do generally enjoy some preference during times of greater geopolitical risk. It makes sense if credit spreads are a bit wider than otherwise.

It makes sense if stock valuations are a bit lower, and so on. So, again, it just makes sense that energy prices are a bit higher too. Some of these things may likely persist, reflecting the sort of world that we are living in.

Okay. I'll stop there, but I've got a few other Iranian-related charts here, so let's just pull those in.

Oil prices higher, but still not high: So here, first of all, is the price of oil, which has been declining quite nicely. I shouldn't say nicely. Of course, oil producers don't like it, but from an inflation standpoint, that was good. From a global growth standpoint, that was good.

Here we are now with the price of oil having increased. Puts it into some perspective though, which is that's a big increase and it does unwind a year's worth of decline.

So not to understate this at all. However, it's still a pretty tame price of oil. This is not a high price of oil. It's certainly lower than the norm was across much of the last 5 or 6 years. Just a bit less of a helping hand than it was. And so, again, as I mentioned, incrementally less growth, incrementally a bit more inflation emerges as a result of this.

And we'll see if it sticks. And again, if the Strait of Hormuz proves to be less blocked than people fear, then maybe the price gets to go back down. We will see in terms of how long the conflict lasts, because, of course, Iran itself produces in the realm of 3 million barrels a day. And, it may be of questionable ability to export its own oil as well until there is some sort of resolution.

Betting markets would suggest this is something that probably takes a month or a bit longer. This is sort of the central tendency of what we're seeing. And so that's manageable, I think. If it were to last for months and months and months, then you would start to think, well, price of oil does need to be enduringly higher on that basis.

So we will see. 

Geopolitics in perspective: conflicts have surprisingly small market impact: And then pardon the small font, pardon all sorts of things on this slide. But I think this is actually a very powerful table if you can actually figure out what's going on here.

So this is something we've done over the span of many, many years, indeed, several decades at this point in time.

It looks at what does the stock market do. This is the Dow Jones Industrial Average, what it does in response to major acts of war, essentially. And you can see it's broken into four different categories:

the U.S., the aggressor

the U.S., the target

external events that just don't involve the U.S.

terrorism

And aside from the date, the main columns speak to, essentially:

the decline in the stock market that resulted from those events

the number of days that the market was declining or the number of days to reach the trough

the reaction period, which is actually the number of days it took to get back up to the prior peak, you could say, or the prior level before the event happened.

And certainly we won’t go into all the weeds here, and speak to all of these. But I really want to focus in, as you might guess, on what's inside that red circle, which is just the average. It's the median experience of all of those acts of war. And so on average, the market goes down for five days.

On average, the decline is a 2.7% decline, which I'm not to understate. That's a big enough decline, but it's not 22.7%. It's 2.7%, and on average the reaction period, meaning how many days it takes for the market to bounce right back to where it was before that thing

You see one on here that's 240 days. And so it's not always 12 days. But again, that's the median. Half the time it's less than that.

And so, just to make the point that maybe it's surprisingly small, the reaction you normally get. The reaction we're getting so far is very much in line with that.

And very often you get a rebound quite quickly. And I shouldn't speak to intraday market movements. They happen to be rebounding a bit as I'm saying this. But it could be completely different tomorrow and the next day. But I would say tentatively the interpretation so far does fit with this. These tend to be more opportunities to go take a bit of risk if you want to, as opposed to reasons to enduringly retreat.

Okay. Let's shift over to some conventional economic stuff before I get into AI, which is another special topic in a moment.

Developed world manufacturing is OK and seemingly ticking higher: So, just to step back from the excitement of what's happening in the geopolitical world to the economy, these are manufacturing PMIs. This is essentially a manufacturing survey, giving us a sense of what's happening in this case in the developed world.

The main message would be everything is fine. But actually, if anything, you look at the right side of that chart, we've seen a bit of an acceleration recently. If anything, we are seeing an improvement in economic conditions and I would say just consistent with our view that 2026 should be, barring further, exogenous shocks that get in the way.

It should be a pretty decent year for the economy. It's starting out that way, at least.

And then I'll show you this table.

Economic growth outlook remains positive: So it's going to take a little explanation for those who care about GDP numbers. On the left, you can actually see our 2026 GDP forecast for the U.S. is 2.5.

Canada's 1.4. You go down the list from there. So what should we think about those numbers?

We've actually framed this as five different ways of thinking about those numbers. And is it good? Is it bad? Is it okay?

The first one is just, well, how do we change our forecast? We had a forecast for 2026 last quarter as well.

And we've updated it this quarter. Did it go up or did it go down? As you can see actually in in five of the six cases it's gone up. In Canada's case it actually went down a little bit. So Canada is the exception on a few fronts here. Went down a little bit in Canada. Not a great end to 2025.

The economy shrank in the final quarter. We don't have a resolution to the USMCA trade deal. If you'd asked us nine months ago, we sort of thought, well, maybe by the spring or the late winter you'd have some clarity as to that deal. And we don't have any, and so that's a bit of a drag. But for most countries, we actually were in the business of upgrading the forecast, so that's nice.

Hence the green. The next column is ‘level.’ This is really just saying, okay, you forecast 2.5 for the U.S. Is that a good number or is that a bad number? It's a pretty good number. In fact, the numbers are pretty good for all the countries.

You might say, well hold on. For Canada, 1.4 is not very much.

But this is a country with no population growth right now. If anything, the population might even be shrinking slightly. So that is actually pretty decent economic growth for a country with no population growth. It is sort of at its potential or maybe even running a little bit through. So that's nice too.

And then ‘momentum.’ This would just say, well now the economy is done 2025.

What happened there? Are you expecting 2026 to be better than last year or is going to be worse than last year? And swer is for most ‘yep.’ In 2026, we're forecasting a bit more growth than we got in 2025. The U.S. is the exception. The U.S. was just moving so much faster than everyone else last year that there's probably less upside.

But ultimately most countries are set to move faster. The next column is ‘relative.’

This is really just saying, let's compare the six countries. Who's the fastest growing? You can see the U.S. and South Korea are, and Japan's the slowest. So that's a bit of a zero-sum games. They were never all going to be green. But nevertheless, there you have it.

And then the last column is ‘versus consensus.’ Maybe I’m buying the lead here. This is actually what moves markets. Versus consensus are we above the consensus or below? And you can see again in all but one in five of the six we are above consensus. So we are optimists in theory, to the extent the economy feeds into markets, which is only very indirectly.

You can say we're optimists from a market standpoint. Canada is an exception. Again, we are a little bit below consensus.

And then really what we've done here is we've said, okay, five different ways of looking at this forecast. We just smooshed them together in the ‘overall’ column in the far right. So we said the overall is pretty constructive.

You should feel good as opposed to bad. Even Canada should feel okay. I will admit, and it's a bit of a running joke among economists: every economist generally hates their own domestic market, loves all the other markets, and in part because you kind of see the warts of the economy that you're in and you miss some of the warts the other economies have.

And so we are sensitive to the risk that we're being unfairly pessimistic on Canada. And as it happens, we think we've got it right. We're aware of that as a bias. But I'll just mention that as a classic forecasting bias. Okay. And so let's move on here.

Just another little economic comment.

U.S. credit spreads show benign environment, but with new pinch of concern: This is U.S. credit spreads. They're up a little bit. You can kind of squint your eyes and see that little arrow in the far-right side, but I think the broader picture and message is that credit spreads are still quite narrow. And often that happens when you're towards the end of a cycle, kind of in a late cycle, which can be a multi-year experience, but generally something that can be sustained, generally a reflection of economic conditions being pretty decent.

So we think we're getting that signal from the credit market right now, notwithstanding some acute concerns about private credit, and leveraged loans and a few other spaces that are very clearly tied, we think, to the software sector, which is just being repriced right now.

Speaking of software sector being repriced, the AI scare trade.

AI scare trade – new models disrupt software sector: So again, thinking about the negative bits of AI as opposed to the exciting positive bits, you can see this is an index looking at essentially software companies that are exposed or vulnerable to AI.

And so most certainly they are down. Maybe there's a degree of stabilization that has since been achieved, but they are down quite significantly. I won't say they aren't vulnerable. Certainly, there is some vulnerability. I know our portfolio managers would say that they feel that perhaps the software sector is being painted with an awfully broad brush, and there are some companies with really good moats that can likely do very well in this environment, even with AI, or even use AI to their advantage, whereas others are more vulnerable.

So I suppose there's an opportunity in there to buy those that have been painted unfairly and sell those that have not yet been fully repriced, but nevertheless on the net it makes sense there's been some reduction there. Hard to say whether it's the exact right size or not. But again, the impressive thing is even this has happened.

The overall stock market has held roughly steady. And so you've seen other sectors like consumer durables and energy and others actually perform quite nicely, suggesting some level of resilience. And as I said earlier, actually may be a healthy thing to get some of these long dormant sectors starting to move again.

I'm going to dig now into another AI subject:

Electricity availability is downside risk to U.S. AI aspirations

This one maybe seems a bit of left field, but it's an important one, which is, you know, we're digging our way. In fact, Josh and I and my team have done a lot of this digging our way through some of the fundamental questions about AI and how fast can it improve and all sorts of variations on that. How much capital expenditures can we expect?

We did some work in the last couple of weeks on electricity and essentially recognizing there's a real potential pinch point here, and it's a downside risk to these tech companies doing what they want to do with AI. If they don't have enough electricity to power their data centres. And so let's just run through the big thoughts here.

And so the first is just electricity demand is now rising significantly. Data centres need a lot of power. And the plans are to invest hundreds and hundreds of billions of dollars in data centres over the next few years. And you can see from the chart on the right that indeed, electricity consumption in the U.S. is rising after a period of essential stagnation for 15 years or so.

So something is changing and that something is significantly data centres, we think. Then you have to frame that though against the supply side. Well, maybe supply can keep up. Supply is rising. It is rising more quickly than it used to. So there's all sorts of responsiveness here. But it is rising too slowly, it would appear, and it takes multiple years to construct a new source of electricity.

And the approval process, at least to my eyes, is dysfunctional. And so most of the projects proposed never get approved, never get off the ground. It's a very messy business. And it's getting tricky, too, because initially I think there was some excitement. Every state thought, oh, great, we'll be in the AI business.

Let's get some data centres going. But, those data centers are proving very unpopular with voters. Right now, they don't employ a lot of people, at least beyond the construction stage. They consume a lot of electricity. They are raising the electricity costs for other consumers. That's becoming a political issue. It's going to be tricky to really get some of these data centres online.

That's one of the big themes here: it might be the downside risk to CapEx in the AI sector is that the electricity supply is difficult to bring online. So in terms of implications, it does suggest higher power costs in the U.S., which is inflationary and a competitive disadvantage versus China and so on.

Again, we do think that we will see AI investment continue to rise. We may see – in fact, we've seen – announcements that there will be a lot of investment in power infrastructure as well, including nuclear plans revived and so on alongside these data centres. And so, to that purpose, we may yet see taxation or the pricing of electricity in a way that properly charges data centres for their marginal demand that's otherwise increasing the price for everyone.

Again, just to flag the main point, which is there is a downside risk to the rollout of AI on the basis of the availability of electricity, but much less of a constraint in China. By the way, China has been investing far more in electricity. They're lagging in AI. This could help them catch up, though.

Okay. Jobless claims low.

U.S. jobless claims not showing any economic distress or major AI effect: It might feel like I've just drifted away from artificial intelligence. I guess I have, in a sense, but I did just want to say, for all of the layoffs that have been announced recently and tech companies getting rid of workers and the idea that AI is disrupting, there is some truth to that.

We can see – if you really, really look hard – some evidence that recent university graduates are getting jobs to a slightly lesser extent, particularly in software and a few other places. But I did want to start with the observation that, when you look at the economy-wide labor market – and no one's denying that technological change disrupts certain sectors – usually, though, other jobs are created elsewhere.

So far, the labor market metrics are holding together. Unemployment is low. Jobless claims are also quite low and quite steady in recent years. We're not seeing a joint schism at this point.

Still, let's run through some scenarios here. Here's where things get a little crazy. Let's do it. And so all sorts of ways AI could go from here.

Many AI scenarios: And so, I would say at the most conservative end of the spectrum, it could prove to be a minor general-purpose technology. That's the term: general-purpose technology. This is the idea for these big, important technologies that come through and prove relevant over a span of a few decades and affect how many of us live our lives and how many businesses operate.

And so even the cautious scenario is saying this is a pretty big deal. The cautious part is just saying, well, maybe it adds a little bit to productivity growth. Maybe it doesn't take over the world. Maybe it doesn't develop general intelligence. It's just a tool that's pretty darn useful. But not totally world-shaking.

And maybe then some of the tech companies are investing too much in it. Maybe they don't get a good return on their investment. That's the distinct risk there. And productivity runs just a little bit faster from an economic standpoint.

Then you get the second scenario, which is maybe this is a major general purpose technology.

This is the kind of thing that comes along at best, once in a generation. Here AI keeps getting better and the applications prove really broad and quite profound. And there is some job displacement. Some workers lose jobs in sectors that really automate a lot. And some sectors are hurt as well, like some of these software companies perhaps.

But it does create other opportunities, which prior historical, major general purpose technologies have done. Productivity growth accelerates. So you have this period of faster economic growth. And the investment made by all these tech companies proves to be a pretty good one. They get a solid return on their investment. And unemployment isn't massively, enduringly higher than it was before, etc.

Then you get the third scenario.

So this is where AI is an unprecedented disrupter, different than all of the other technological advances historically, much more consequential. But you'll notice no words yet because there are three sub-scenarios here, we think.

The first one is the one people have been really fretting over recently. There's been a lot of research published quite prominently on the dystopian outcomes.

So this would be where there's nothing like it and it is really bad. There will be an economic disaster. You see tons of job losses. Every company can lay off 10% of their workforce, and they all do. And hey, what do you know? Economic demand is now 10% smaller. And it's kind of this race to the bottom.

And so productivity gains are real, but they're outweighed by falling demand. Labour loses and owners of capital lose because no one's buying anything. And the economy does really badly. And so that's an awful outcome. And not too likely, we think. But it's not impossible either.

Conversely, it is worth recognizing there is the utopian scenario.

This is the best case, AI is a huge deal, scenario. And so AI is so productive and so efficient that the economy goes extremely fast and you end up in this world of abundance, where there's just plenty of everything for everyone. Productivity gains are enormous. And there are giant returns for the tech companies that invested in it.

And the AI-adopting companies benefit a lot. Government revenues surge because of all these benefits and because the economy is bigger. And, yes, labour is displaced partially or fully or something in this scenario. But government revenue is so enormous that it's able to compensate workers. And so you end up with people just enjoying a lot of leisure. Keynes, 100 years ago, was talking about 15-hour work weeks and so on.

And it hasn't worked out that way so far. But maybe it does work out that way with AI. I don't think that's too likely. We would probably give similar odds to the dystopian and the utopian outcomes. And I should emphasize – I should have said this before – we think the most likely scenario is just that it's a major general-purpose technology.

This is the second of the three up at the higher level on the chart. But, you know, not impossible. And then just recognize there is a mixed scenario as well within the ‘this is an unprecedented thing’ scenario. The answer there would be the economy grows faster, there are big productivity gains. This is a big deal after all.

Equally, there are major job losses. But maybe AI is taxed to limit the displacement. And that money is used for retraining and to compensate the people who have lost their jobs. The owners of capital win a lot. Labour loses somewhat, but moderately. And you end up with an economy that is still able to grow when it's not a disaster and so on.

Honestly, one of the big reasons why I wouldn't give a big weight to dystopia is just because I think you would see governments seeing this happen, stepping in either trying to limit the application of AI or tax, compute or some variation on that in a way that just tilts you towards the mixed outcome, if that makes sense.

And so lots of ways this could go. Sorry not to have a single concrete conclusion. We've been debating this internally as well. I would say, again, just to circle back among those top three scenarios, we would say all three are quite viable. We think the major general-purpose technology is the most likely one.

If we were to go in that fascinating, unprecedented disruptor direction, we would say the mixed outcome is overwhelmingly the most likely, maybe even an 80% chance within if that was the way you were going to be. Maybe a 10%, 80%, 10% kind of scenario.

And so that's where we are right now. We’re certainly trying to continue thinking through this and certainly very open to new information persuading us of a different possible outcome.

Okay. Well, that was a lot. And yet we're not done. So let's just jump our way through.

I think I made a little quip in the opening slide, in the title slide, that two weeks ago this would have been chart number one.

Replacing IEEPA tariffs with a 15% baseline helps EM trading partners, but questions remain over reimbursement, legality: The U.S. Supreme Court overturned IEEPA tariffs, as I mentioned. We have since seen the White House introduce other forms of temporary tariffs. They're only good for 150 days. Nevertheless, this shows you how each country is affected. And so I would say, loosely speaking, the takeaway is that the tariff rate on the UK goes up a little bit.

They had a 10% deal, and basically a 15% blanket tariff is now going to be applied. And so they get a little bit worse for 150 days or so. The other countries mostly get a little better. Most other countries were paying 15% already. No big change. Or 20% for a lot of emerging market countries, or technically 35% for Canada, which isn't paying 35% on a whole lot of things.

Nevertheless, a few items are now a bit cheaper. So on the net, a slight reduction in tariffs. But big questions here. Is this new temporary tariff legal? So the IEEPA tariff wasn't, apparently. So is this new temporary tariff legal?

I've seen different opinions, but there's a real chance that gets overturned. There is still another trick the White House can pull.

There are kind of more permanent tariffs they can apply later. We're still assuming they do that. But it may take them a while to get there. And so tariffs are a bit lighter for now. There's a chance tariffs could be a lot lighter for a temporary period of time. I would still say fast forward a year – we're assuming tariffs look not too different than where they were a month or two ago. So we're not convinced a new lighter tariff era will endure.

There is a question of reimbursement as well. Will the people who paid the IEEPA tariffs that were illegal get reimbursed? You might think logically they should. The betting markets I look at would suggest probably not.

I won't get into the legal reasons why it is in play. But at this point we're assuming that there will not be major reimbursements, which would really complicate the U.S. fiscal picture and have all sorts of other implications as well.

Okay. Loss of trust in the U.S. Let's say a few words about that. So two charts here.

Profound global loss of trust in U.S.:  On the left side we can say this is a survey of the world, the world's attitude toward the U.S. and maybe unsurprisingly, attitudes toward the U.S in dark blue are souring.

They are now below zero. So net negative and kind of amazingly at the same time, attitudes toward China in gold have been not just rising, but turning positive and are now outright higher than they are for the U.S. Indeed, the U.S. isn't much higher than Russia right now.

So, again, attitudes to the U.S. have soured quite a bit. That’s part of the broader or diminishing U.S. exceptionalism story.

We think that continues to play out. And so just to be aware of that and informing a little bit of maybe capital realignment around the world and our asset allocation that's in some cases shifting a bit outside of the U.S. and so on.

And then really just seeing the same thing but looking at it from the perspective of different countries and their individual views on the U.S are a bit more mixed.

And you certainly do find countries – a non-trivial fraction – who are still net positive on the U.S. In fact, I think it's about half of them are still net positive on the U.S. But you will note the great majority have seen a worsening of their attitude toward the U.S. over the last year and so almost everyone is more pessimistic.

And so just reflecting I suppose those underlying trends. Okay.

Declining U.S. exceptionalism visible in FX: And then just to reflect on this, this is not quite fair because this is now showing how international currency reserves have diversified away from the U.S. There is less U.S. holding on the far right. There is more holding of certain assets on the left, holdings of gold have gone up quite a bit in particular. I should concede this is not over the last year.

This is over the last decade. So there have been shifts underway for quite some time. And we do believe some of these trends are longer than just the last year. But it does speak to, again, a U.S. that's still very, very special. And it is still the world's reserve currency. And we think not about to give that up in any profound way in the visible future.

Nevertheless, we are seeing some diversification away from the dollar. And that probably is to the disadvantage of the U.S. at the margin.

And so I guess the other question is, well, you know, it's all fine and good to say that the global order’s shifting and the rest of the world is grumpy with the U.S. and so on, but how lasting are those changes?

How lasting are the changes to the global order? It’s hard to say, is the first answer. But to the extent that it's tempting to say, well, maybe it all reverts back to normal with the next presidency, since this has been such an unorthodox presidency. And so maybe. However, there are reasons to think that much of this changing global order remains altered.

And so, first of all, no real debate, the multipolar world is here. It's no longer a hegemonic world. China is a big deal. It's not about what the U.S. does or doesn't do at this point in time. It’s not clear that U.S. leadership in the future will fully reverse course. if you get another Republican president, would they go against President Trump's landmark actions?

It’s not clear. Democrats have not been particularly pro-free trade in recent years. And so on both fronts you could see things like tariffs sticking around.

I would say U.S. reputational damage has been significant. These things don't get reversed in the short run. There is a lot of soft power that has been lost. Similarly, there was a rule-based order.

Now it's a power-based order. It generally takes generations to construct these things. They are not easily restored. And so that probably is enduringly lost. Big, powerful countries can push their weight around and get away with it. We are seeing this quite regularly around the world.

And then the rest of the world has snapped awake to see that they were slumbering and they were relying on the U.S. too much, and they were vulnerable to some of these exposures.

And they will probably not soon slumber again.

Similarly, if you want to say that some of the changes we're seeing in the world, anti-immigration and anti-free trade and so on, you could call that populism. And the rise of populism is certainly visible in the U.S., but it's not limited to the U.S. We see in particular far-right populism on the ascent across a large fraction of Europe and elsewhere.

This is not just a U.S. story, and therefore it is not just a function of a U.S. presidential cycle. So all that is to say, not that every little bit of what's been going on continues to go on indefinitely. There is scope, we think, for maybe some tempering over time, but slow and incomplete. And a lot of these things may stick around for far more than just a few years.

Okay, one slide on Canada, then a couple of market slides and then I'll set you loose.

A promising sign: Canadian businesses are becoming less worried: For Canada, just to flag that as much as the economy has been no great shakes, Canadian businesses are becoming significantly less worried. And so they were in full out panic a year ago when large tariffs were being threatened.

As much as there is still not a resolution to USMCA trade negotiations, we have seen small business confidence really snap back and actually reach outright optimistic levels. And in fairness, there has been some deregulation happening and there have been some tax cuts and there has been some monetary stimulus. We're hoping for a little extra productivity growth as well.

And so that combination seemingly has small businesses feeling pretty good. We're not forecasting miracles for 2026. But we do think there's room, particularly in the second half of the year, for something of an economic acceleration as well, even though we don't land above consensus, as I spoke about in that earlier table.

Okay. Just a couple of quick market thoughts.

Stocks are not especially cheap: It’s nothing really related to what's happening today versus yesterday, but just to flag the inherent tension here. On stock market valuations globally -- the dark blue line – the fact that you're above the zero line indicates that stock market valuations are, on average, more expensive than normal. So PE (price-to-earnings) ratios are higher than their historical norm. This makes it a bit more challenging to invest in stocks.

I would note, though – with the gold line – as much as it's becoming less attractive, actually excluding the U.S., stock valuations are still on average a bit cheap. So that’s one of the reasons that we've been making some shifts in terms of allocating a bit away from the U.S. and toward other markets. But on the net, you wouldn't say valuations are compelling if you only examine the U.S., but neither are they as expensive as they look.

But earnings picture is quite favourable: The earnings picture, though, is really the positive story and the key driver for any kind of stock market optimism. You can see almost regardless of the market you're looking at, we have been seeing stock market earnings rising quite nicely.

You can’t see it here, but I happen to know it when you look at the earnings forecast for the next year they're also quite strong. We’re seeing almost universally double-digit earnings growth – 10% plus earnings growth – which is quite strong. It seems as though these may well be achieved. And so that's your best argument for why the stock market can continue to go up despite valuations that you might say are imperfect.

Combination of rate cuts + economic growth are usually market positive: Just to frame things a bit of a different way in and to throw all sorts of chaos onto your screen again: another way to think about the investment outlook is through investment or economic regimes. And so, if we talk about one economic regime as being no recession, the alternate is an economic expansion.

That's the one element of this matrix. The other is whether it's a rate cutting cycle or a rate hiking cycle – easing, not tightening. That takes you to the top left corner here. That quadrant historically, and this is using U.S. data, has been the most favorable. You have had generally healthy stock market gains. You've actually very often had pretty decent bond market gains as well.

A classic 60/40 stock bond portfolio has done very well indeed in that kind of scenario. Certainly, you don't have to be in that exact scenario to do just fine when the economy is expanding. Stocks generally do reasonably well, even when there's monetary tightening, when there's a recession. But with rate cutting, generally bonds do well. I mean, you want to avoid rate hiking and a recession together, which happens a vanishingly small fraction of the time.

The bottom right quadrant is what you don't like to be in. I don't think anyone's really debating as to whether we're going there. But where we are right now historically has been actually a pretty good time. And so not to oversell the outlook going forward, and it's fair to say that we might be coming closer to the end of the easing cycle, which would start to draw more attention to the bottom left quadrant, perhaps. Nevertheless, where we are right now historically has been pretty good.

In general, we're happy enough to be invested for that reason. Okay, I'll stop there. As always, I'll say thanks so much for your time. If you found this interesting, please do consider following us online. Our website has all sorts of insights from me and from others as well at rbcgam.com/insights. Do check out our LinkedIn page as well.

All sorts of research is posted there. Or check that QR code. And I'll say again, thanks so much for your time. I wish you well with your investing. And please consider tuning in again next month.