Market commentary: second quarter 2026

SEI's Canadian view

There is widespread agreement that the Canadian economy has struggled in recent years and quarters—the most recent string of quarterly gross domestic product (GDP) data confirmed it. However, those reports, especially the first quarter of 2026, were not quite as bad as headlines suggested. Business investment remained weak (outside of inventory additions), but consumers proved resilient and manufacturing continued to show positive momentum. While net exports detracted from GDP, this was due to strong imports rather than a sudden decline in trade activity. Finally, a modest population decline across both quarters contributed to the weak GDP prints, while per-capita growth remained positive—an encouraging sign that argues against the economy having fallen (or falling) into recession.

Although services sentiment turned down in June, survey respondents in other industries indicated that business activity has continued to pick up, especially in goods-producing areas of the economy. Low levels of business investment have been a challenge for the Canadian economy for several years. Encouragingly, the Bank of Canada's (BOC) most recent Business Outlook Survey (BOS), conducted in May 2026, found that the number of businesses planning to increase investment has continued to pick up and is now running well above its long-term average.

The BOS also found that respondents had an increasingly favourable outlook for exports. As we've noted previously, growing exports can help a country reduce domestic debt levels over time, which is particularly relevant to Canada right now. The BOS was conducted in May, when the Strait of Hormuz situation was much cloudier and energy prices were much higher, so we won't be surprised to see some volatility in these areas in future BOS surveys. That said, these indicators coincide with a notable global upturn in manufacturing activity and outlooks, so this does not appear to be a narrow, energy-only story. Furthermore, the commodity shortages caused by the Strait of Hormuz closure will require replenishment of above-ground supplies. As a result, we do not expect sharply lower energy prices (which have rebounded recently on renewed frictions between Iran and the U.S.) to undermine these dynamics significantly.

The Canadian dollar has been under pressure in recent years due to the low-growth, relatively low-interest rate domestic environment compared to the rest of the world. While most currencies have weakened against the U.S. dollar recently, the loonie has been weakening against a broad range of other currencies as well. This reduces import purchasing power and the spending power of Canadian tourists, but there are some beneficial trade-offs when it comes to trade. A weaker CAD against a backdrop of improving export prospects should be a powerful combination in support of both domestic growth and income.

Other considerations that support our optimistic outlook for Canada include relatively tame core inflation measures that are likely to remain within the BOC's desired range of one- to-three percent, a lower risk of tightening monetary policy as a result (compared to economies where inflation is running persistently above central bank targets and threatening to rise further), and a solid pipeline of national government expenditures focused on infrastructure, military investment, and greater energy and trade resilience.

The dynamics we've outlined put us in agreement with numerous other forecasters who are projecting a stronger economic environment in Canada in the next 18 months. Of course, a stronger economy is not guaranteed. Risks to our outlook include negative surprises on trade, inflation, interest rates, the AI buildout, and geopolitics. Among those, the status of the Canada-United States-Mexico Agreement (CUSMA) is a clear and present risk. The U.S. recently denied Canada's formal request for a 16-year renewal, which triggers a series of annual reviews and potential annual renegotiations until the agreement sunsets in 2036. This essentially kicks the can down the road with an overall effective U.S. tariff rate in the single digits—not ideal for Canada (or Mexico), but far from a worst-case outcome. That doesn't rule out future trade frictions with a sometimes mercurial U.S. administration, and it's important to remember that CUSMA's Article 34.6 allows any of the three countries to withdraw unilaterally six months after providing written notice. But for now, CUSMA looks set to continue in something like its current form for the next decade or so which, though imperfect, provides at least a measure of stability on the trade front.

As we like to remind investors, financial market behavior doesn't neatly follow economic cycles—something that Canadian markets' solid performance over recent years confirms. However, an improved domestic growth environment (and a strong external-growth environment) should lend further support to corporate performance within Canada, possibly with a lower degree of bond market volatility than in a number of other countries. A diversified global portfolio should benefit (albeit with periodic volatility) from exposure to the global AI buildout, as well as older-economy sectors that stand to benefit from it, industries that may benefit from eventual AI-driven productivity enhancements, undervalued areas that stand apart from the AI-investment wave, and, where relevant, exporters and non-currency-hedged positions that should benefit from a weaker loonie.

Important Information

SEI Investments Canada Company, a wholly owned subsidiary of SEI Investments Company, is the investment fund manager and portfolio manager of the SEI Funds in Canada.

The information contained herein is for general and educational information purposes only and is not intended to constitute legal, tax, accounting, securities, research or investment advice regarding the Funds or any security in particular, nor an opinion regarding the appropriateness of any investment. This information should not be construed as a recommendation to purchase or sell a security, derivative or futures contract. You should not act or rely on the information contained herein without obtaining specific legal, tax, accounting and investment advice from an investment professional. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. There is no assurance as of the date of this material that the securities mentioned remain in or out of the SEI Funds.