Q3 2026 Fund Commentary

Commentary and opinions are provided by Capital Group.

Market commentary

Global equities delivered positive returns in Canadian dollar terms over a volatile third quarter. Surging demand for artificial intelligence (AI) gave way to concerns about overexuberance, the U.S.-Iran conflict flared and subsided, and strong corporate earnings competed with persistent inflation.

U.S. stocks rose, with earlier AI winners giving back gains while software and mega-capitalization information technology stocks recovered. The U.S. Federal Reserve Board held interest rates steady in July, then raised its target rate to a range of 3.75% to 4.00% in September, its first increase in more than three years. Renewed attacks on Middle Eastern energy infrastructure pushed oil prices higher.

European stocks ended broadly lower because rising energy prices, inflation concerns and political uncertainty weighed on markets, and the European Central Bank raised rates by 25 basis points. Developed Asian markets gained, led by Hong Kong and Japan, where strong earnings outweighed expectations for further Bank of Japan monetary tightening, while emerging markets edged lower on higher bond yields and oil prices.

Performance

Recruit Holdings Co. Ltd. and Natera Inc. contributed to performance. Shares of Recruit Holdings rose sharply after better-than-expected results showed that Indeed, its hiring-matching platform, is benefiting from AI rather than being disrupted by it. Natera stock surged as earnings showed rising test volumes and revenue growth, led by broader adoption of its molecular residual disease test.

Zhongji Innolight Co. Ltd. and Tokyo Electron Ltd. detracted from performance. Shares of Zhongji Innolight lost ground as investors took profits after an earlier AI-driven rally, and shortages of critical components limited its ability to meet demand. Tokyo Electron sold off sharply because investors cut risk across AI infrastructure stocks on concerns about memory pricing and oversupply, even though its earnings were strong.

At a sector level, stock selection and an underweight allocation in the consumer discretionary sector contributed to performance. Industrials and business services exposure also contributed, as did stock selection in health care and in North America. Stock selection in information technology detracted from performance, and exposure to financials also detracted.

Portfolio activity

The sub-advisor added Howmet Aerospace Inc., increasing exposure to commercial aerospace after weakness in the sector. In the sub-advisor's view, large aircraft backlogs and Howmet's specialized engine components support a strong competitive position. The sub-advisor also added Palantir Technologies Inc. after very strong revenue growth and a more attractive valuation.

The sub-advisor increased Taiwan Semiconductor Manufacturing Co. Ltd. because of its leadership in advanced manufacturing processes, long-term partnerships and strong execution. Microsoft Corp. was increased after results showed growth in Azure and Microsoft 365 commercial, better operating margins and positive free cash flow.

Tokyo Electron was sold because, in the sub-advisor’s view, much of the expected strength in semiconductor spending is already reflected in the company's earnings expectations. Deutsche Telekom AG was sold after strong performance and a drop in conviction, partly because a possible consolidation of T-Mobile US Inc. could be a negative catalyst. Deere & Co. was reduced after strong share price performance, because the near-term outlook for agricultural equipment remains mixed.

Outlook

In the sub-advisor's view, the fundamental cycle supporting markets hasn't broken, even though bubble-like behaviour remains evident in some areas. Equities absorbed a more difficult macroeconomic backdrop because earnings were stronger and broader than expected, leaving the sub-advisor somewhat more constructive than defensive, though the margin for error has narrowed.

We believe the evidence that large investments in AI can generate adequate returns is moving in a favourable direction, with demand broadening beyond the leading AI labs. The sub-advisor remains focused on profitable, cash-generative businesses and continues to find opportunities outside AI. Interest rates, debt levels and geopolitics remain the clearest risks, and the sub-advisor may rotate as the evidence changes.