H2/2026 Outlook – Buy the Dips

Since publishing our 2026 outlook Don’t Bet Against the Fed, there have been substantial changes to the geopolitical landscape. The removal of Maduro in Venezuela and the Iranian conflict have increased oil prices and as a result, the inflation outlook. World economic growth has been better-than-expected in the face of higher oil prices. Brompton expects flare-ups to continue in the peace negotiation process but we believe both sides will eventually de-escalate. Our base case scenario is uneven, but resilient economic growth. Oil prices and tariffs appear to have peaked but should still have a lagging effect on inflation.

Central banks have shifted from an easing to tightening bias. The European Central Bank and Bank of Japan have already increased interest rates. With the new Federal Reserve (“Fed”) Chairman Kevin Warsh’s first meeting, expectations shifted from easing to a Fed rate hike in 2026. Due to the coming midterm elections, we currently do not expect a rate hike until after the election.

Below is the Purchasing Managers Index (PMI) which is a leading indicator of economic activity.

PMI Leads GDP

Whether it be a combination of previous Fed rate cuts, reindustrialization, AI, or the One Big Beautiful Bill, the US economy appears to be accelerating.

Brompton expects strong double-digit earnings growth across the board. Below are the next 12 months earnings growth (growth for 2026) for Canada, US, Japan, & Europe along with valuations and year-to-date performance.

Canada tends to be more cyclical and benefits from global growth. The obvious risk is the USMCA negotiations. With the July 1, 2026 deadline for the 16-year renewal passing, the agreement in subject to annual rolling review. The agreement remains in force for another decade, provided no country exits. The worst-case scenario would be for the US to announce they are pulling out of the trade agreement in order to negotiate separate bilateral agreements with Canada and Mexico. The uncertainty for trade continues with select Canadian products facing a possible 50% tariff in the US,  Brompton believes this is a negotiating tactic to pressure Canada into accelerating trade discussions.

With high valuations and lower growth, we expect the Magnificent 7 to continue to be a source of funds. Breadth in the market has been very narrow, concentrating on the AI theme whereas earnings growth has been very broad based, as shown by the chart below with strong breadth across nearly all sectors.

Earnings revision breadth has recently been solid in most sectors

Breadth calculated as [(# pos. revisions – # neg. revisions) / total revisions]

With stock markets typically driven by earnings, we expect the next phase of the market to be driven by the rest of the market.

The S&P 500 has actually underperformed nearly all of these markets year-to-date. With strong international earnings growth coupled with lower valuations, we expect international markets to continue this outperformance. Margins and Return on Equity are expected to remain elevated to support the high valuations in the US. The chart below shows how the current P/E ratios are supported by the robust returns on equity.

Higher ROE has supported higher P/E multiples

Brompton expects continued volatility due to the high valuations, fluctuating geopolitical risk, and sticky inflation. The typical seasonality in a mid-term election year is a drawdown in the summer and a rally into the end of the year once there is more visibility of the outcome of the mid-term elections.

Since stock markets are typically driven by earnings which are strong, Brompton expects most major stock markets to end the year higher. AI and geopolitical risk have been the dominant market themes, and we expect both to continue driving significant investment in AI capacity, infrastructure, trade diversification and industrial reshoring. At the same time, increased deregulation around major project permitting and the financial sector in Canada and the US could help support stronger economic growth.

Brompton’s Approach

For investors seeking exposure to the broader AI opportunity, Brompton Tech Leaders Income ETF (TLF) offers a way to participate in leading technology companies benefiting from this long-term growth theme.

For exposure to the infrastructure buildout supporting AI, trade diversification and reshoring, Brompton Global Infrastructure ETF (BGIE) provides access to companies positioned to benefit from these structural trends.

For investors looking to participate in the financial sector, Brompton North American Financials Dividend ETF (BFIN) offers exposure to financial companies that may benefit from deregulation and improved growth prospects.

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