Economic Outlook

July 15, 2026

Investment Outlook
and Portfolio Strategy
Q3 2026

Economic Outlook

Sustained Inflation

Geopolitical risks have subsided following the peace deal between the U.S. and Iran that has prompted a resumption of energy flows through the Strait of Hormuz and sent oil prices plunging lower. Upside risks to inflation and downside risks to growth have eased in response. Still, the macroeconomic landscape continues to be dominated by a combination of still-elevated inflation and structurally hawkish central banks that has limited any notable upside for the global economy.

The inflationary impulse has intensified, given three critical forces: The Middle East conflict, the AI boom and trade policy. In the United States, inflation is expected to remain persistently above the central bank’s 2% target, with second-round effects from higher energy costs yet to be fully felt across broad categories. Further, while the sharp decline in oil prices will undoubtedly alleviate some price pressures, risks remain skewed to the upside.

The U.S.-Iran détente remains fragile, with many contentious issues still to be worked out. While negotiations are taking place, the risk of setbacks and/or re-escalation – and a resurgence in energy prices – cannot be ruled out. Meanwhile, cost pressures stemming from the AI buildout have leapt to the forefront and have yet to generate a meaningful disinflationary impulse. At the margin, the massive spending blitz may be contributing to inflationary pressures amid rapidly rising memory chip costs, given robust demand that is fueling supply shortages (“chipflation”). Finally, trade policy dynamics are likely to resurface in the second half as the United States prepares to impose new tariffs under Section 301 (replacing expired Section 122 levies at the end of July) and as USMCA negotiations drag on, prompting a prolonged period of trade policy uncertainty.

Outlook & Investment Strategy

The outlook ultimately hinges on the reaction function of the Federal Reserve in an environment where inflation is running well above target. Should long-term inflation expectations remain reasonably anchored, the Federal Reserve is likely to lean against tightening aggressively and will opt to live with above-target inflation, with little appetite to spark a hard landing for the economy. A Federal Reserve on hold suggests economic conditions will shift towards a disinflationary, trend-like pace (“Sustained Inflation”) versus a worst case “Stagflationary” and/or “Recessionary” outcome stemming from aggressive rate hikes. However, should long-term inflation expectations de-anchor to the upside, the Federal Reserve would undoubtedly be forced to act. Over-tightening could turn stagflation into recession, should the supply-side shock (higher inflation) translate into a growth shock (demand destruction).

The environment of uncertain geopolitical and trade dynamics, still elevated inflation and the diminished prospect of interest rate relief argue for a defensive stance on equities. We maintain an underweight allocation to bonds given that central banks are likely to be held hostage by still-elevated inflation. That leaves cash as one of the few places to hide, given the increased potential for market turbulence. Finally, this tumultuous backdrop underscores the case for private markets strategies, which can prove instrumental in enhancing the overall risk-reward proposition in the strategic asset allocation. Namely, non-traditional sources of income such as private credit and real assets provide a relatively stable return profile, lower volatility and diversification benefits (uncorrelated to public markets), while private equity has demonstrated an ability to outperform public equities, even in market downturns, with less volatility.

Economic
Scenarios

Main Scenario – Sustained Inflation

45%

In this high probability scenario, upside risks to inflation and downside risks to growth subside in response to the peace accord between the United States and Iran. As the Strait of Hormuz reopens and energy flows through the vital waterway resume, oil prices tumble back towards pre-conflict levels. Still, there are some notable forces that risk keeping inflation sustainably elevated – including the potential for re-escalation in the Middle East conflict and a subsequent spike in oil prices, the artificial intelligence (AI) boom and associated supply-side stress and the prospect for higher tariffs from the U.S. administration. Should long-term inflation expectations remain reasonably anchored – central banks would likely lean against tightening aggressively and opt to live with elevated inflation – with little appetite to induce a hard economic landing. Still, a higher for longer rate environment suggests economic conditions would shift downwards to a trend-like pace.

Scenario 2 – Stagflation

30%

Upside inflation risks continue to loom large on the back of an erratic geopolitical and trade environment. However, the trajectory for the global economy hinges on the reaction function of the Federal Reserve and other major central banks. In this scenario, a spike in long-term inflation expectations would undoubtedly force central banks’ hand and monetary policy would be tightened in response. Policymakers prioritize bringing inflation under control, with the economy assuming the collateral damage from an aggressive tightening event. That macroeconomic outcome tilts the scales towards an environment of “stagflation” – with upside risks to inflation coming up against downside risks to growth.

Scenario 3– Recession

15%

While the worst-case outcomes stemming from a tumultuous geopolitical and trade backdrop have been averted (reducing the risk of recession), the potential for flare-ups remains a tail risk. On the geopolitical front, a worst-case outcome involves a protracted conflict that leads to sustained disruption to global energy flows. A long-lasting supply shock and a spike in oil prices risks morphing into a demand-shock and a contraction in economic growth. Trade dynamics also pose risks to the outlook. While negotiations and trade deals brought some relative stability, there’s still little clarity on the policy direction and the long-run tariff regime. The U.S. is set to impose new tariffs in the second half under Section 301, the United States-Mexico-Canada Agreement (USMCA) negotiations are dragging on and Europe is also weighing further trade-protectionist policies. These developments may pave the way for a prolonged period of trade policy uncertainty – with the potential to dampen global economic activity.

Scenario 4 – Productivity Boom

10%

In this optimistic scenario, massive investment in artificial intelligence (AI) boosts productivity (and accordingly, growth) without the associated upside pressures on inflation – an environment of “disinflationary growth” that allows the Federal Reserve to resume its easing campaign. Indeed, a productivity shock is unanimously dovish for the Federal Reserve. While inflation declines and reinforces the case for easier monetary policy, a reduction in labour supply keeps the unemployment rate relatively contained. Moreover, productivity gains spread more broadly around the world, with buoyant tech investment and higher stock prices buttressing global growth.

Discussions regarding potential future events and their impact on the markets are based solely on historical information and Fiera Capital’s estimates and/or opinions, and are provided for illustrative purposes only. General Market projections are hypothetical estimates of long-term returns of economic asset classes based on statistical models and do not represent the returns of an actual investment. Actual results could vary substantially. Models have limitations and may not be relied upon to make predictions of future performance of any account. Past performance is not a guarantee of future results. Inherent in any investment is the potential for loss.