The next six months: expect the unexpected

Avoid complacency, look for opportunities in volatility

The first half of the year had a little of everything. We have all come to expect the unexpected under President Trump, but the events that have unfolded caught even the most cynical off guard.

Heading into 2026, one of the consensus calls was that the U.S. Fed’s rate-setting Federal Open Market Committee (FOMC) would cut interest rates. They were one of the last central banks to normalize policy after the aggressive rate hikes over the past few years, and it was time to correct that. Inflation was expected to fall, and yields would follow. But as is often the case when everyone agrees, that wasn’t what happened.

It started with a shockingly successful strike on Venezuela that resulted in the U.S. essentially taking control of the country (and its oil reserves) in a matter of hours. Markets appeared to cheer this outcome, and that likely embolden President Trump to take further action. After a year of tariff wars, the pivot was to actual shooting wars.

By the end of February, the attack began on Iran with expectations of a similar result to Venezuela. But, it wasn’t that easy. There was no decisive outcome, and the attacks resulted in an almost worst-case scenario. The old regime remained in place with the Strait of Hormuz blocked and commodity prices skyrocketing higher.

Crude oil prices that had been drifting lower surged, with West Texas Intermediate climbing to over $110 a barrel. Grains and other commodities followed. Suddenly that dream of a drop in inflation vanished, and with it, yields spiked. The month of March saw a rise in volatility and fall in equity prices. Investor sentiment fell with the market.

Cracks in the Mag7

To further add to market uncertainty, the rise of AI was suddenly seen as a threat to many software companies as well as white-collar jobs. The Magnificent 7 names, which had looked invincible, started to show cracks. The race to build data centres was sucking up all of the free cash flow these companies could generate.

Most symbolic of the AI spend was the price of dynamic random access memory (DRAM). This overlooked technology commodity is in everything. As demand surged, prices followed, and we suddenly had another source of inflation. The rise of DRAM, the move higher in oil prices, and the still-present tariffs are likely making the case for interest rate cuts a challenge. We are even hearing calls for rate hikes, a scenario that had almost a zero chance of happening a few months ago.

Yet this is far from the worst start to the year for equity markets. Most equity indexes are up around 10%, and bond markets are positive. In our view, there remain elevated levels of cash on the sidelines looking to buy on any dip, and that is helping to keep a bid to markets, preventing the selloff many had feared.

More stormy weather ahead

But at the halfway point of the year, while hard to believe, it’s difficult to expect the second half to be much calmer. One overwhelming positive has been that corporate earnings were stronger than expected, and continued earnings resilience will likely remain important. There is also an expectation that the worst may be behind us for the U.S.-Iran war, as neither side wants this to continue. In addition, the new Federal Reserve Chair, Kevin Warsh, must thread the needle of the need to lower inflation and not look like puppet for a president desperate for a strong economy heading into the mid-term elections. For Canada, there remains the inability to reach an agreement with the U.S. on a new USMCA deal. All these questions will keep investors on their toes and have the potential to elevate volatility.

One nuance to this market that is different from past years is the amount of new equity and bonds in circulation. After many years of a corporate buybacks shrinking supply, that has flipped. The SpaceX IPO looks to be just the start as other large deals are to follow. On the fixed-income side, it has already been a record year for high-yield bond issuance. Going back to simple supply-and-demand models, the underlying support of fewer shares outstanding has gone away, and increased supply is now a headwind.

Summer markets are tricky to predict due to light attendance and lower trading volumes, but they are notoriously volatile. While investors should be thankful for the positive start to the year in the face of several real struggles, this is hardly the time to get complacent. We believe there will be opportunities for active managers to prove their worth in this environment, and they need to do so. Enjoy the warm weather but be ready to act on market dislocations.

Greg Taylor, CFA, is the Chief Investment Officer and a Portfolio Manager at PenderFund Capital Management.

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