There’s More Behind this Week’s Market Nerves

Key takeaways

Rising oil prices and renewed AI concerns gave markets a risk-off tone this week
U.S. earnings growth remains strong and is broadening beyond the Magnificent Seven
Softer Canadian inflation and fragile growth argue against a prolonged Bank of Canada hiking cycle

Why did markets turn risk-off this week?

Our Director and Head of Canadian Investment Strategy BeiChen Lin sees two main forces behind this week’s more cautious market tone: higher energy prices and renewed questions around artificial intelligence investment.

U.S. bond yields moved lower, with the 10-year Treasury yield falling back below 5%. At the same time, equity markets came under pressure, with the S&P 500 falling around 1.5% on Thursday and the Nasdaq declining just under 3%.

See more: Stock Market’s Wall of Worry Gets Taller

Oil was one source of concern. West Texas Intermediate crude moved above $100 per barrel during the week as geopolitical tensions continued to support energy prices.

However, for Lin, the broader economic context is an important mitigating factor. The U.S. is now a net energy exporter, leaving the economy less vulnerable to higher oil prices than during previous energy shocks. The result is Russell Investments’ U.S. outlook remains constructive unless oil rises toward $120 per barrel and stays there for several months.

What is driving concerns around AI investment?

Questions around the AI investment cycle also resurfaced this week. Several large technology companies pointed to further increases in AI-related capital expenditure, prompting investors to ask whether those investments will ultimately generate sufficient returns and how long that payoff might take.

Those questions remain difficult to answer with certainty. Lin’s view is that periods of volatility like this reinforce the importance of staying disciplined and focused on long-term investment objectives rather than reacting to day-to-day market moves.

Why is U.S. earnings growth broadening?

Beneath the market volatility, the corporate earnings picture remains strong. S&P 500 blended earnings growth for the third quarter is running just below 30% year-over-year, following two previous quarters of strong growth.

More importantly, that strength is becoming broader. Non-Magnificent Seven companies are now generating stronger earnings growth than the Magnificent Seven themselves. For Lin, that broadening could create a more supportive environment for active management as leadership extends beyond a relatively narrow group of large technology companies.

The earnings picture is also strong outside the U.S., with emerging markets expected to deliver earnings growth of more than 70% year-over-year in 2026.

Does the Bank of Canada need to hike?

Finally, attention is turning to next week’s Bank of Canada meeting. Canadian inflation data released this week was broadly encouraging. Headline inflation came in slightly below expectations, while core inflation moderated from the previous month on a year-over-year basis.

Some investors remain concerned that the Bank of Canada could raise rates, particularly following relatively hawkish comments from Governor Tiff Macklem and indications that businesses may try to pass higher costs on to consumers.

Lin believes the wider economic backdrop argues for caution. The Canadian economy remains below its long-term potential, unemployment is close to 6.5%, and trade-policy uncertainty continues to weigh on the outlook. Many of the inflation pressures seen in 2022 are also no longer present.

The result is that he argues there’s currently little need for the Bank of Canada to begin a prolonged series of rate hikes. The Bank could still leave rates unchanged next week, depending on upcoming retail sales and manufacturing data. Even if policymakers do raise rates, Lin does not believe multiple hikes are necessary at this stage.

That relatively softer economic backdrop also supports the view that Canadian government bonds continue to offer attractive value.

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