From Noise to Signal: Navigating Markets in 2026

Executive summary

The start of 2026 has been marked by an unusually dense flow of geopolitical headlines with many events unfolding rapidly and over weekends. While these developments have contributed to short-term market volatility, their near-term macroeconomic impact has, in most cases, remained limited. With the notable exception of Japan, where bond market dynamics appear more structural, the underlying global economic outlook hasn’t materially shifted from expectations set at the start of the year.

As political noise intensifies, monetary policy is re-emerging as one of the more durable influences on market conditions. Major central banks are no longer moving in lockstep, with domestic growth, inflation, and labour market conditions increasingly shaping divergent policy paths. Upcoming central bank meetings are, therefore, more likely to reinforce policy differentiation than deliver abrupt surprises.

At the same time, recent events have highlighted a deeper structural change in the global order. Western alliances are not dissolving, but the forces that bind them together are shifting away from shared values and toward economic, financial, and security dependencies. Efforts by middle powers to hedge or diversify relationships face clear constraints, and expectations of rapid realignment or decoupling appear overstated.

For investors, the key challenge remains separating headline risk from structural risk. Markets have shown resilience in the face of political shocks, but narrow suggest greater sensitivity should future developments begin to alter policy frameworks or financial conditions in a more lasting way.

Head-spinning headlines and the limits of macro impact

The opening weeks of 2026 have delivered a barrage of geopolitical headlines with many events unfolding over weekends, leaving markets, policymakers, and my team reassessing the narrative with unusual frequency. Venezuela one weekend, Greenland the next, renewed trade tensions with Europe shortly after, all layered on top of political uncertainty in Washington. In isolation, any one of these developments might have dominated the macro conversation. Taken together, they have created an unusually frenetic start to the year.

 

Yet an important distinction has emerged between headline volatility and macroeconomic substance. With the notable exception of Japan, where developments in the government bond market suggest something more structural may be underway, most recent geopolitical flashpoints have had limited near-term macroeconomic consequences. Markets appear to be reflecting this assessment. Equity markets have rebounded following periods of de-escalation, reinforcing the view that investors are increasingly inclined to look through political noise unless it materially alters growth, inflation, or financial conditions.



This distinction matters. While political and geopolitical risks remain elevated, the broader macroeconomic backdrop for 2026 has not materially shifted from the baseline that we established at the start of the year.

Year 2 of Trump’s second term: volatility without a macro reset

As the U.S. administration enters the second year of its current term, markets continue to contend with an environment defined by unpredictability. Headlines have generated short-term volatility, but thus far have not been sufficient to alter the macroeconomic outlook in a lasting way.

 

The more relevant question isn’t what might generate the next bout of volatility, but what would be required to fundamentally change the economic trajectory. Extreme scenarios, such as a direct military conflict between major powers, would clearly overwhelm economic considerations. Recent developments, however, have stopped well short of that threshold.

Monetary policy remains one of the few areas capable of producing a genuine macro inflection. The U.S. Federal Reserve’s (“Fed”) leadership and policy direction therefore continue to matter, although recent signals point toward continuity rather than disruption. Absent a sharp and unexpected shift in the Fed’s composition or mandate, monetary policy risks appear contained relative to the geopolitical noise dominating headlines.

Central banks back in focus as policy paths diverge

As the calendar turns to the first major round of central bank meetings for 2026, monetary policy is re-emerging as a key source of differentiation for markets, even as geopolitical developments continue to dominate attention. Unlike the 2022 to 2024 period, when common shocks pushed major central banks to move largely in lockstep, domestic economic conditions are once again exerting greater influence over policy decisions.

In the United States, the Fed appears likely to remain on hold in the near term. While recent inflation data have softened and unit labour cost growth has moderated, economic activity has remained relatively resilient, and the unemployment rate has stabilised. This combination reduces the urgency for further policy easing at upcoming meetings. At the same time, easing underlying inflation pressures suggest the Fed retains flexibility later in the year, particularly if productivity trends continue to offset wage growth. Near-term outcomes are therefore likely to centre on a pause, accompanied by cautious communication rather than a decisive policy shift.

In Canada, the focus is increasingly on growth momentum rather than inflation risks. Recent GDP data point to an economy that continues to struggle to gain traction, with weakness extending beyond temporary strike-related effects into goods-producing sectors such as manufacturing. While this softness reinforces the view that monetary conditions remain restrictive, it’s unlikely, on its own, to prompt an immediate policy response. The Bank of Canada has already indicated that it considers its easing cycle complete for now, reflecting concerns around labour supply dynamics and the risk of renewed inflation pressures. As a result, upcoming meetings are likely to emphasize data dependence rather than provide explicit forward guidance.

Elsewhere, policy divergence is becoming more pronounced. Growth prospects appear softer in parts of Europe and the U.K., where easing wage pressures may provide greater scope for rate cuts later in the year. By contrast, Japan and Australia face firmer domestic demand and more persistent underlying inflation pressures, pointing toward a different policy challenge. This divergence suggests that interest rate differentials, rather than a synchronized global cycle, may play a more prominent role in shaping currency and bond market dynamics in 2026.

Taken together, upcoming central bank meetings are unlikely to deliver dramatic surprises. Instead, they are more likely to reinforce a theme that is becoming increasingly important for investors: monetary policy is no longer moving as a single global tide, and domestic economic conditions matter more than geopolitical rhetoric when it comes to setting policy paths.

A changing Western alliance, from shared values to shared dependencies

One of the more consequential themes emerging from recent weeks isn’t the dissolution of the Western alliance, but a change in what binds it together. Under the previous U.S. administration, the transatlantic relationship was framed around shared democratic values and common political purpose. That glue has weakened.

This shift was articulated in recent remarks by Prime Minister Mark Carney, who described the current moment as a rupture rather than a transition in the international order. The distinction is important. A transition implies continuity with adjustment. A rupture suggests that some of the assumptions underpinning alliances, cooperation, and economic relationships are being reassessed.

In practice, what is emerging is an alliance increasingly held together by dependencies, and in some cases, explicit leverage. Technology, security, defence capabilities, and the central role of the U.S. dollar in global finance now form the core pillars of Western cohesion. This shift underscores the extent of U.S. leverage over allies and highlights the constraints faced by so-called middle powers, including Canada.

While there has been renewed discussion of middle powers coordinating more closely in response to this fractured environment, deep reliance on U.S. systems in areas such as security, technology, and finance continues to limit how far that independence can extend. What has changed, then, isn’t the existence of the Western bloc, but the mechanism of cohesion, moving from shared values toward a more transactional and, at times, coercive framework.

Hedging toward China, but only to a point

Against this backdrop, some countries, including Canada appear to be exploring more cautious hedging strategies, engaging selectively with China in response to uncertainty surrounding the U.S. relationship. Beijing has sought to position itself as a supporter of multilateralism, open trade, and the rules-based international order, particularly in contrast to the tone emanating from Washington.

However, there are clear limits to how far such a pivot can extend. Reducing dependency on one hegemon by increasing dependency on another offers limited strategic relief. For Europe in particular, China has shifted from being primarily an export opportunity to an increasingly direct economic competitor. Moreover, China’s domestic economic challenges and export dynamics risk intensifying trade frictions rather than easing them.

As a result, selective hedging appears more plausible than broad strategic realignment. While this may reduce U.S. influence at the margin, particularly in areas such as technology controls and supply chains, it does not signal the emergence of a China-centered alternative capable of replacing existing Western structures.

The limits of European strategic autonomy

The idea of Europe forming a distinct third bloc, independent of both the U.S. and China, resurfaces during periods of heightened geopolitical stress. Yet the constraints remain substantial. Defence spending faces fiscal and political limits across much of the continent, and even where spending increases are feasible, Europe remains heavily reliant on U.S. defence technology and industrial capacity.

Financial autonomy presents similar challenges. Proposals for jointly-issued European bonds have repeatedly failed to gain traction, despite multiple crises that might have served as catalysts (for example, Eurozone crisis in 2012, Russia invasion of Ukraine,. The primary obstacle has been political coordination across twenty-seven sovereign states. Even if progress were achieved, implementation would likely take many years.

As a result, expectations for rapid European decoupling from U.S. dependencies appear overstated. Structural change is possible, but likely to be gradual and uneven.

Market implications: separating signal from noise

The early weeks of 2026 have reinforced a familiar lesson. Not all shocks are macro shocks. Political developments can generate volatility, but unless they alter policy frameworks, financial conditions, or economic behaviour, their market impact often proves temporary.

The global system isn’t fragmenting neatly into geographic spheres of influence. Instead, it’s evolving into a more complex set of overlapping blocs, bound together by history, institutions, technology, and finance. These linkages remain durable, even as political relationships become more transactional.

From a market perspective, the key takeaway is the importance of distinguishing between headline risk and structural risk. Volatility may remain elevated, but the macro foundations have so far proven resilient. That said, the persistence of narrow risk premia and subdued volatility suggests markets may be less forgiving if future developments move beyond rhetoric and begin to alter policy frameworks or financial conditions in a more durable way.

Closing perspective: positioning for resilience and opportunity in 2026

Looking ahead, our outlook for 2026 remains constructive, particularly with respect to equities. The equity market backdrop continues to appear supportive, even as volatility persists, and the artificial intelligence theme remains a durable, multi-year influence on economic and market outcomes, rather than a short-lived cycle.

 

At the same time, attention has increasingly shifted toward the broadening of market leadership. As the AI investment cycle matures, market outcomes may increasingly reflect a transition from a narrow focus on who is spending toward a broader set of companies and sectors that are positioned to earn from that investment. This evolution supports greater diversification across regions, sectors, and factors, rather than reliance on a small group of dominant names.

 

Alongside equities, liquid alternatives, both as potential return enhancers and as diversifiers, may become increasingly relevant components of diversified portfolios. In an environment characterized by policy divergence, episodic volatility, and compressed risk premia, strategies that provide differentiated sources of return and diversification may play a more meaningful role in enhancing portfolio resilience.

 

Taken together, our approach for 2026 continues to emphasize discipline, diversification, and thoughtful portfolio construction. Rather than reacting to headlines, the focus remains on positioning portfolios to participate in long-term opportunities while managing risk through balance, diversification, and a forward-looking perspective.

 

Sincerely,