Global economic outlook: Headwinds and tailwinds

A striking dichotomy exists between the sentiment of consumers and businesses versus the confidence reflected in financial markets. Recent data show that consumer sentiment in both the U.S. and Canada remains subdued, driven by elevated policy uncertainty — levels comparable to the Great Recession of 2008 and the COVID-19 pandemic of 2020.

Conversely, financial markets display remarkable composure. Volatility across equities, currencies and fixed income remains near historical lows, suggesting that markets are looking beyond prevailing uncertainties. This divergence has underpinned robust performance in equity and bond markets through 2025 and into 2026, with tight credit spreads and healthy credit issuance signaling benign conditions despite Main Street’s anxiety.

Several headwinds temper the outlook for global growth and asset markets.

Equity valuations

Particularly in the U.S., valuations remain elevated, limiting future return potential.

Tariff uncertainty

Although the peak impact of tariffs on growth and inflation may have passed in some regions, ongoing uncertainty continues to cloud the outlook.

Geopolitical risk

Elevated risks span domestic issues in the U,S. — including tensions between the U.S. Federal Reserve and the Trump administration — international disputes — such as U.S.-Canada trade negotiations, and U.S.-Europe discussions on Greenland — and regional conflicts, including the Middle East and Ukraine).

Immigration

In the U.S., reduced immigration is creating a supply shock, tightening the labour market and posing long-term growth challenges.

Policy uncertainty

Persistent ambiguity in U.S. policy remains a drag on both consumer and corporate confidence. For Canada, the potential cancellation of the United-States-Mexico-Canada Agreement represents a significant unknown, though economic self-interest will most likely prompt the U.S. to preserve the agreement, albeit on terms more favourable to them than in the present agreement.

Despite these headwinds, several positive forces are expected to outweigh the negatives over the next 12 months.

Artificial intelligence (AI)

Continued investment in AI infrastructure, while likely not matching its outsized impact on GDP growth observed in 2025, will remain a key growth driver, especially in the U.S. and tech-heavy markets like Korea, Taiwan and Japan.

Fiscal policy

Fiscal stimulus, including tax cuts in the U.S. and targeted spending in Canada, Germany and Japan, is transitioning fiscal spending from a drag on growth to a tailwind, and will be further bolstered by sustained military expenditures in many countries.

Productivity growth

Strong investment in technology is fostering an upswing in productivity, at least in the U.S.

Monetary policy

Recent rate cuts by the Bank of Canada (BoC) and the European Central Bank (ECB) and ongoing easing by the U.S. Federal Reserve continue to support growth. We expect further cuts in the U.S. in 2026. The BoC and EBC will likely stay on hold.

Canada

The outlook is more constructive. Despite no further rate cuts expected from the BoC, the effects of prior easing, fiscal stimulus and positive real wage growth should support a gradual recovery through 2026.

U.S.

A benign growth slowdown is anticipated. While the labor market has weakened, AI investment and productivity gains have so far offset this drag on growth. We expect a moderation in U.S. growth, with risks of further deterioration in employment being closely monitored as a key downside risk to our benign view.

Europe and Japan

Both regions are benefiting from fiscal tailwinds and improving growth prospects.

China

The Chinese economy remains reliant on a large trade surplus, supported by a deliberately undervalued renminbi. While this strategy offsets weak domestic demand, it poses potential risks for future geopolitical friction with the U.S.

Equities

CIBC Asset Management maintains an overweight stance on equities, notably in Canada. Key factors include attractive valuations, positive earnings outlooks, favorable sector composition — with gold as a tailwind — and competitive dividend yields. These advantages position Canadian equities as a tactical overweight relative to strategic allocations.

Fixed income

A tactical underweight is advised in core fixed income, particularly in Canada and Germany. While fixed income retains a strategic role as a portfolio counterweight, current conditions favor equities and select commodities.

Commodities

The outlook is positive for copper and gold, driven by AI-related demand and risk hedging, respectively. Oil, however, is expected to face supply-driven headwinds over the next year.