Executive Summary

The macroeconomic outlook has shifted significantly since our 2026 Outlook. The Iran conflict has already spiked global energy and food prices, and the stalemate keeping the Strait of Hormuz closed to commercial shipping could create supply chain disruptions that send underlying inflation soaring.

The US economy lost momentum in March as uncertainty spiked and inflation-weary consumers and businesses paused spending plans to assess the damage. This has cast doubt on the durability of the pickup in economic activity and labor markets that was evident on the eve of the conflict.

The near-term implications for markets run through the shifting path of forward interest rates. The gradual easing trajectory for US rates that was expected at the start of the year has been priced out. Traders don’t yet expect outright hikes, but the odds that the Fed’s next move will be up rather than down rise with each day of the blockade of the Strait.

Tell that to the stock market, which is partying like it’s 2025. After initially correcting as oil prices shot up, equities have now shrugged off inflation and interest rate risk as strong pre-war earnings roll in. The AI infrastructure buildout and government largesse supporting growth appear impervious to hot geopolitical developments. We think another correction is due, but we do see opportunities for stock pickers in undervalued industries, notably software.

The long-promised pickup in private equity activity continues to elude the industry, which was poised to benefit from a surge in M&A before the Iran conflict put deal-making plans on ice. The prospects for a reacceleration are now scenario-dependent.

In Canada, we’ve been surprised by the robustness of the economy to a series of policy realignments and external shocks. A successful renegotiation of the trading relationship with the US could clear the way for an investment-led recovery. If you’re willing to carry risk on the trade negotiations, now may be the time to go long domestic equities and the loonie.

Finally, we’ve refreshed our medium-term scenarios. Typically, these evolve gradually between quarterly refreshes, with updated probabilities and minor tweaks. It’s a sign of the scale of the supply shock underway that we have formulated three new scenarios, primarily based on the persistence of that shock and the Federal Reserve’s response to it.