A common theme for the year ahead is discipline through diversification, whether via active management, international exposures, cash buffers, or carefully considered alternatives.Tadamichi/Supplied
Stocks carried the day for Canadian investors once again in 2025, with domestic equities providing total returns of about 30 per cent. Global returns were similarly robust, as markets brushed aside tariff risks and embraced artificial intelligence.
Money managers are now considering if 2026 will see similar performance, or if the next 12 months require a revised playbook.
Most money managers remain constructive on equities, despite ongoing valuation risk, market concentration and policy uncertainty. A common theme for the year ahead is discipline through diversification, whether via active management, international exposures, cash buffers, or carefully considered alternatives.
Dealing with pricey U.S. equities
While many asset managers and advisors remain constructive on stocks, opinions are divided about whether to remain tilted toward the U.S. market or seek alpha through a rotation into other regions.
“It’s expensive and narrow,” says Brett Gustafson, associate portfolio manager at Purpose Investments Inc. in Calgary, of the U.S. stock market.
While U.S. equities remain central to portfolio construction, Mr. Gustafson is underweight on them, citing valuations close to the top of their decade-long range, making forward returns more fragile.
Although U.S. stocks are expensive, Kathryn Del Greco, investment advisor with Del Greco Wealth Management at TD Wealth Private Investment Advice in Toronto, doesn’t view them as too stretched when looking through the prism of earnings momentum and U.S. policy tailwinds. Corporate tax relief, deregulation and a gradually easing rate environment all support current multiples, she says.
“Valuations are and can continue to be supported,” she says, adding that lower policy rates have historically expanded price-to-earnings ratios.
Investors can’t fully insulate themselves from the AI theme, she says, which could reshape earnings across sectors. “This could actually be the J-curve of AI this year,” she adds.
Similarly, Mr. Gustafson says investors should seek balance rather than abandoning U.S. positions. Splitting exposures between cap-weighted and equal-weighted strategies makes sense, in his view.
Geographical diversification
Ms. Del Greco and Mr. Gustafson suggest U.S. exposures be tempered in 2026 by international diversification, with return potential to be found in Europe and Japan after years of underinvestment.
“You want to start to shift toward where those other opportunities may provide better value,” Ms. Del Greco says.
Mr. Gustafson likes emerging markets, where he says earnings momentum is broader and starting valuations remain more attractive after a prolonged period of relative underperformance.
“They’re in a materially better place than they’ve been at any point in the past decade,” he says of emerging market equities, and persistent global underinvestment has created room for significant capital inflows.
Fixed income and alternatives
With North American central banks likely in a holding pattern well into 2026, according to a December report from BMO Global Asset Management, the outlook for bond returns is comparable to 2025.
Canadian government bond yields are expected to trade within the 2.8- to 3.6-per-cent range, the asset manager’s active fixed income team estimates. U.S. yields will be higher given the Federal Reserve Board’s higher policy rate.
BMO GAM expects better performance from corporate credits, with aggregate returns of 5 to 6 per cent between its high-yield and investment-grade allocations in 2026.
Wesley Blight, portfolio manager with Scotia Global Asset Management’s multi-asset management team in Ottawa, says active mandates that can exploit yield-curve shifts and credit dispersion will outperform.
“That view is grounded in a largely benign interest-rate environment,” he says, which should make active credit selection and allocations into areas such as private credit more attractive.
Mr. Blight says alternatives should play an even bigger role in portfolios in 2026. Private credit is a growing focus for more conservative, income-oriented investors, and Scotia GAM is evaluating higher allocations to private equity within several growth mandates.
Mr. Blight says an alternative weighting of about 8 per cent is appropriate for “most clients.”
David Popowich, portfolio manager and advisor with Popowich Karmali Advisory Group at CIBC Private Wealth in Calgary, is putting more client assets into alternatives because of the relatively expensive stock market.
He advocates about a 16-per-cent weighting to alternatives, although he’s focused on investments without stringent redemption conditions.
“Stick to your liquid alternatives,” he advises, highlighting “vanilla” long-short, option-based and multi-asset strategies as practical diversifiers without the illiquidity and complexity of private structures.
Ms. Del Greco says TD is targeting as much as 18 per cent in alternatives for balanced growth portfolios in 2026, a notable shift from a few years ago. But she cautions that such allocations require a long-term mindset and awareness about the lack of liquidity.
“Equities remain the preferred portfolio engine,” she says.