Quarterly report: Q3 2026

Performance ending September 30, 2026. Sources: Morningstar Direct, Bank of Canada and U.S. Department of the Treasury.

Momentum faded as rate-hike expectations rose

The third quarter looked remarkably straightforward for investors until September.

Through most of July and August, markets continued to climb despite rising oil prices, escalating trade tensions and persistent inflation pressures. Canada’s TSX repeatedly reached record highs rising nearly 16% year to date by mid-August and surpassing 37,000 points for the first time. The major U.S. indexes also remained near historic highs, supported by strong corporate earnings and economic growth.

Confidence faded in September, though. The turning point came when the U.S. Federal Reserve (the Fed) raised interest rates for the first time since 2023 and signalled that further hikes remained possible. Attention quickly shifted to the bond market, where the benchmark U.S. 10-year Treasury yield climbed above 5% by late September, its highest level since 2007.

After spending much of the summer pushing to new highs, stock indexes became far more sensitive to interest-rate expectations. The TSX suffered its worst week of the quarter in September, falling more than 2%. The major U.S. indexes also slipped as investors reassessed the outlook for inflation and monetary policy.

Despite September’s pull-back, the TSX finished the quarter 1.1% higher, marking its ninth consecutive quarterly gain. The S&P 500 and Nasdaq also continued their longer-term upward trend, while the Dow declined as investors grew more cautious.

Different sectors drove Canadian and U.S. markets

In Canada, positive earnings from the Big Six banks suggested the economy remained in solid shape. When quarterly results arrived in late August, RBC, CIBC, TD, BMO, Scotiabank and National Bank all exceeded expectations. Strength in personal and commercial banking, wealth management and capital markets operations helped offset concerns around tariffs and trade disputes.

U.S. earnings told a different story. Rather than focusing on banks or commodity-linked businesses, investors spent much of the quarter watching a small group of technology companies for signs that AI spending remained strong. Microsoft’s Azure cloud-computing business surpassed US$100 billion in annual revenue in Q3, while Amazon reported its fastest cloud-computing growth in more than four years. Semiconductor manufacturer AMD also reported a 50% increase in quarterly revenue and raised expectations for its data-centre business, reinforcing the view that heavy AI infrastructure investment continues.

Canada’s economy remained resilient despite trade tensions

Canada faced no shortage of challenges in Q3. Trade negotiations with the U.S. collapsed in late August, triggering a new round of tariffs and retaliatory measures affecting roughly $28 billion of goods on both sides of the border. The developments raised fresh concerns about trade, investment and economic growth.

Despite those headwinds, Canada’s economy grew at an annualized rate of 3.3% in the second quarter, while employment remained relatively stable.

September also brought reasons for long-term optimism in Canada. More than 100 of the world’s largest investors gathered in Toronto for the Canada Investment Summit, representing approximately $120 trillion in assets under management. The federal government used the event to outline plans to attract $1 trillion in new investment over the next five years, focusing on infrastructure, energy, technology and critical minerals.

What investors focused on

For much of the quarter, investors focused on corporate earnings, economic growth and whether businesses would continue investing heavily in AI. By September, attention had shifted toward inflation, interest rates and the bond market. The speed of that transition showed that market narratives can change quickly, even when underlying economic conditions evolve gradually.

What to watch for

Investors will continue monitoring inflation data, central-bank policy decisions and bond yields. They’ll also look for signs that economic growth is stabilizing or slowing, particularly as higher borrowing costs work their way through the economy.

What you should remember

Q3 demonstrated how quickly attention can move from one market theme to another. While the headlines shifted throughout the quarter, the fundamentals that support long-term investing remained largely unchanged: earnings growth, economic activity, diversification and a disciplined approach.