Jimmy Jean, chief economist of DesjardinsChristinne Muschi/The Globe and Mail
The S&P/TSX Composite Index has staged a sharp comeback, rebounding more than 1,000 points so far this month. Equity markets have been able to swiftly absorb shocks as investors remain cautiously optimistic, looking past near-term headwinds and focusing on expectations for double-digit corporate earnings growth.
Business sentiment has also improved. According to the Bank of Canada’s Business Outlook Survey published on April 20, future sales indicators have recovered to their historical average. Recent heightened market volatility has provided long-term investors with attractive buying opportunities.
To discuss where markets may be headed and where investors should position their portfolios, on April 16, The Globe and Mail spoke with Jimmy Jean, chief economist and strategist at Desjardins Group.
In part two of this interview below, Mr. Jean discusses the sustainability of the market rally in this uncertain geopolitical environment and suggests assets to consider owning. In part one, which was published on Wednesday, Mr. Jean broadly provided his inflation expectations arising from the Iran war and the potential impacts on the economy, interest rates, the Canadian dollar and the consumer.
What are your thoughts on the sharp rebound that we’ve seen in April? Is it a reflection of short covering or do you see it as a sustainable rally?
I think a lot is predicated on anticipation that the oil shock will find a positive conclusion, which may be premature given what we know about the extent of the traffic in the Strait of Hormuz that is hampered, and also there is structural damage to producing infrastructure that could take a long time to repair. From that perspective, if oil prices stay high for longer than the market expects and it takes a long time to normalize, the impact that this has on profitability might make those implicit earnings assumptions hard to validate and the market could be in for some negative surprises. I think it’s a bit premature to rally back to previous levels and even exceed previous levels.
In a report that you published on March 27, you forecast an average return of 12.5 per cent for the S&P/TSX Composite Index in 2026 and the S&P 500 to have an average return of 9.1 per cent. Are you still comfortable with those targets?
Our targets have not moved too significantly. In the near term, the risks are skewed to the downside. We might still see a lot of volatility before things settle. But as we head into the end of the year, it’s not hard to envision that some hurdles are behind us. And if the outcome of the midterm elections points toward better stability over the remaining part of President Donald Trump’s term, that is something that’s likely to be a positive for the market. So, we still have a cautiously optimistic outlook, but with the caveat that there will be a lot of volatility.
It would be remarkable to have equity markets deliver four consecutive years of double-digit returns.
I agree. A lot of those double-digit returns have been driven by the exuberance in AI. We don’t see a crash in this space, or at least not yet.
But there’s a word of caution, which is why we have range. In the report that you noted, we have ranges for the forecast return for the TSX Composite Index. In 2026, it could decline 5 per cent or rise 18 per cent, which speaks to possible disruptions - if we see a major sell-off coming out of the AI space or in other spaces.
Where do you think we are in this AI boom?
In terms of the technology, I think 2026 is a year of disruption within the space. You have disruption hitting the software vendors whose stock prices have plummeted as AI becomes more of an alternative and compromises those business models. So, AI is not just a threat to some workers, it’s also a threat to other businesses.
But the holy grail on AI is the productivity that businesses that use AI will be able to extract, and that will show in terms of their bottom lines and productivity improvement. I’m in the camp that thinks that you’re not going to see that until AI replaces workers, and I don’t think we’re quite there yet in most situations. The whole scenario about AI eliminating jobs across the economy, I think we’re far from that.
And if AI causes disruptions that are slow enough, it’s also going to create jobs in ways that we can’t even think of. I always give the example of when Apple rolled out, not the iPhone, but the App store. All of a sudden there was that new ecosystem and a whole new economy springing from it - when Uber, Twitter, and all the applications that are ubiquitous today arose. The internet illustrates how long it can take for an innovation cycle from a new disruptive technology to create a major new economy or application that really drives value.
I think markets have been too optimistic as to the speed at which this will occur, and that’s why we’re not yet seeing productivity numbers affected. I think it will happen at some point, but we have to be patient.
And in the meantime, those businesses that are not well positioned for the long haul, in terms of having secured good, cheap energy sources because this is rapidly becoming a constraint, those businesses could be in trouble.
So, investors are going to have to be more discerning in the AI space as to which businesses are well set up to have access to power that they need at a good cost.
When you say investors have to be more discerning, where do you see investment opportunities?
This is where Canada stands out positively because Canada has power supplies. And when you think about all the data centers, cloud computing, all the things that depend on access to cheap and reliable power, Canada has that in abundance and is developing more of.
From a longer-term perspective, given all the materials that Canada has to assist semiconductors and all the critical minerals that remain under underexploited in Canada, there’s a lot to like here when you think about Canadian miners, energy operators, anything that’s tied to building energy capacity or that those critical inputs that will assist in the growth of technologies.
What are your thoughts on this earnings season?
We don’t focus specifically on individual earnings stock by stock, but we’re attentively watching for comments on appetite to hire first of all, but also on cost pressures and how businesses are handling them, whether there’s pricing power, as there was a few years ago, or whether companies are looking at ways to compress their margins, understanding that households are more fragile than before. So we’ll look to understand how much inflation we’re likely to see this time around.
And we’re always watching for any news about AI replacing workers, but so far we haven’t seen much evidence of that on a grand scale.
Where are you seeing equity fund flows?
There’s been more interest in Canada. I think investors understand the need for diversification.
Investing in the U.S. is very much an AI play. That’s not to say that you don’t want to have exposure to AI, but you don’t necessarily need to have the exposure that you find if you just invest all of your portfolio in the S&P 500.
I think there’s going to be more discernment. There are cheaper valuations elsewhere, particularly in Europe. Other markets remain quite attractive, Canada being one of those markets that is looking fairly good, and that’s because this new cycle is really a physical capital cycle. It’s a lot about construction, it’s about building. It’s about energy, and we have a government that wants to unlock Canada’s potential. Canada is well recognized for its natural endowments and its potential in that space.
So, if you’re an investor, you’ve got to look at Canada a bit more and find some of those opportunities because I think there are still areas of the market that are attractive.
So, the TSX can outperform the S&P 500 for another year.
I think so. From a macro perspective, especially when you look at things like materials, energy, and utilities. And financials, which are very diversified with many business lines and they’re investing heavily in AI and they are resilient in their performance as well.
How would you characterize equity markets in 2026? 2026: a year of what?
A year of chaos.
Lastly, is there a key message on equity markets that you want to leave with readers?
Hedge for inflation risk by having more exposure to commodities, more exposure to real assets, and more exposure to real return bonds, inflation-indexed bonds.
This Q&A has been edited for clarity.