Market Factors begins with actionable advice and stock ideas from two strategists concerned about rising bond yields. Section two covers an economist who doesn’t think AI will cause mass unemployment, and the diversion describes an interesting list of musical artists.
Equities
Highest yielders attractive, unlikely to outperform
Two strategists published research reports on the dangers rising bond yields present to equities in recent days. BofA equity and quant strategist Savita Subramanian covered the risks of high yields to U.S. stocks and domestically, Scotiabank’s Jean-Michel Gauthier warned clients against the lure of high-yielding Canadian stocks.
Ms. Subramanian began her report by noting that bonds are more attractive relative to the S&P 500 than at any point in the past 20 years. This analysis compares the risk-adjusted earnings and dividend yields in equities to the risk-free bond yield (the theoretical rate of return one can expect from a debt security that carries zero risk of financial default).
Ms. Subramanian also pointed out that while valuations are poor near-term indicators for stock returns, they effectively predict long-term performance. Current valuations (she uses her own interesting cyclically adjusted PE ratio over 10-year periods for the calculations) point to a marginal 3.0 per cent annual returns over the next ten years, plus a two per cent dividend yield. This combines for almost exactly what the ten-year bond yields with little or no risk.
The strategist still prefers equities with strong leverage to economic growth over both bonds and cash. This would change if the U.S. 10-year Treasury yield hits 6.0 per cent – when historically bonds have rallied and stocks crumbles – or 7.0 per cent if equity multiples are compressed.
The sectors hit hardest during previous hiking cycles were the bond proxies – utilities and real estate - and telecom. Relative safe havens were technology, staples, energy and health care.
Scotiabank’s Jean-Michel Gauthier published “Sticking to GARP and Revisiting Canadian Dividend Strategies” on Friday. The premise of the report is that investors purchasing stocks by highest yield alone are likely to be disappointed with eventual returns.
Government of Canada ten-year bonds are yielding roughly 190 basis points more than the S&P/TSX Composite. The post-financial crisis era of bonds yielding less than equities is now over and investors may be tempted to reach for higher equity yield, exposing themselves to the risk of dividend cuts.
In addition, excess returns for dividend strategies involving high risk stocks have historically been dependent on narrowing corporate credit spreads to government bonds, and spreads are currently moving in the other direction.
Scotiabank developed the High Quality, High Payer stock screen in 2024 with the intention of providing a sustainably profitable equity income investment strategy. The approach combines dividend growth, dividend security, defensiveness and balance sheet quality.
The 30 most attractive stocks using the quality dividend screen are Magna, Imperial Oil, Suncor Energy, Endeavour Mining PLC, Thomson Reuters, Canadian Tire, Quebecor, Canadian Natural Resources, Empire, Open Text, Lundin Gold, Intact Financial, Tourmaline Oil, Stella-Jones, Whitecap Resources, Metro, Great-West Lifeco, Manulife Financial, IA Financial Corp, CCL Industries, TMX Group, Sun Life Financial, Canadian National Railway, Cenovus Energy, CGI, Brookfield Infrastructure Partners, Restaurant Brands, Saputo, Canadian Apartment Properties and Premium Brands Holdings.
Protesters gather with banners and placards outside the offices of Google Deepmind at a protest organized by PauseAI UK and other groups concerned in controlling the development of advanced Artificial Intelligence systems, in London on Feb. 28, 2026.JUSTIN TALLIS/AFP/Getty Images
The future
AI won’t take your job
Apollo Global Management Inc. chief economist Torsten Slok cited a research paper showing AI’s extremely limited ability to replace human employers. The report was reasonably specific - AI will only cost the U.S. economy 300,000 jobs.
Nursing was cited as an example occupation as AI is almost completely incapable of reducing the workload. Homebuilding specialties - framing carpenters, plumbers and electricians running pipes and cables - are also safe despite some popular YouTube videos showing 3D house printing.
Mr. Slok makes a distinction between automation and AI. The sensors underlying autonomous vehicles were being applied well before large language models were released to the public. He writes, “The bottom line is that the hardest physical work is harder to automate than the consensus assumes, and the automation we do get will owe more to decades of mechanical engineering than to the current moment in AI.“
The research report was published by OpenAI so we should all take the conclusions with a boulder of salt. It is also true, however, that technological advancement is taking much longer than expected in recent decades and the flying cars predicted in ’80s movies like Blade Runner are still a long way off.
Eddie Money performs in 2004 in Dubuque, Iowa.Telegraph Herald via AP
Diversions
50 Songs that (might) explain America
Displaced Englishman James Parker presented 50 Songs That Explain America in a recent Atlantic article. Mr. Parker warned that the list is not canonical and doesn’t attempt to represent all forms of music off the top but even so, I have questions.
The entire exercise, including any criticism, is subjective so I’ll try not to fly off the handle. The first listed choice, Eddie Money’s Two Tickets to Paradise, sorely tested this equanimity.
I applaud the selections from Linda Ronstadt, Frank Sinatra, Junior Kimbrough (as an aside, the Kimbrough tribute album the Black Keys released was spectacular), The Ramones, Stevie Knicks, Madonna, Kacey Musgraves, Van Halen (even if the wrong era – it should have been Mean Streets), Schoolly D, Hole, Iggy Pop, Harry McClintock, LL Cool J, Johnny Cash, Bo Diddley and Billie Holiday (not Strange Fruit, though?).
A lot of the music is unfamiliar to me even though I try and keep up to new content to the extent Spotify assists. In my defence I don’t think many Atlantic readers could immediately name songs by Cliff “Ukulele Ike” Edwards, Herbie Mann or Death Grips.
It’s a good list. It’s not just controversial but interesting and eclectic in a way that will have me looking up new songs.
The obvious follow-up question is what a similar list for Canada would look like. The country has produced a ton of good music covering all genres. But, artists like Glenn Gould and Oscar Peterson did not interpret anything uniquely Canadian despite their enormous talent. The list would be dominated by The Hip, obviously, with significant contributions from Gordon Lightfoot, Anne Murray and Stompin’ Tom. Let me know the uniquely Canadian songs you’d add.
The essentials
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Globe Investor highlights
Tim Shufelt explains why it’s a terrible time to be a stock picker
Dividend stocks are getting dinged by rising bond yields. David Berman has some thoughts on the potential buying opportunities that presents
A timely and important question: what will Washington do next if U.S. bond yields keep rising?
CIBC’s chief market technician Sid Mokhtari presents his top 10 stock picks for October
Quick hits
Investors looking for things to worry about can look towards corporate bond spreads. The sector is enduring a double whammy of higher bond yields, which drags corporate yields higher (prices lower), and rising spreads - the amount the yield exceeds the relevant government bond yield. The spread on high yield corporate bonds has climbed from the 2.5 percentage points range at the beginning of 2026 to 3.25 percentage points over government yields now. The biggest potential problem with corporates is that a lot of them are held in ETFs and the market is notoriously illiquid. ETFs forced to sell bonds might not be able to find buyers.
Equity analysts go on marketing tours when they tout their sector to institutional investors. Business-wise this is to generate trading business as fund managers buy the stock through the analyst’s trading desk. BofA Securities analyst Ebrahim Poonawala just returned from a circuit of Europe pushing Canadian bank stocks. His summary report highlights domestic efforts to become the premier destination for global investment capital and how the banks will be big beneficiaries.
Wells Fargo strategist Ohsung Kwon closely follows patterns in Commodity Trading Advisor (CTA) funds, the algorithmically driven portfolios representing the fastest of fast money. His most recent update highlights CTA buying of Nasdaq index exposure, short-term bonds and the U.S. dollar. The CTAs sold gold and long-term bonds and Mr. Kwon expects selling pressure on Japanese equities.
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