Market and economic commentary
August 2026

Reassessment after deleveraging

July was about deleveraging; August was about reassessment. Equity markets moved higher, volatility eased, and leadership broadened into software, energy and materials. The Compass Portfolios all closed positive. The ATBIS equity pools also advanced, while the ATBIS Fixed Income Pool was essentially flat. Up-to-date performance data for all ATB Funds (the Funds)¹ can be found here.

Below are index one-month total returns in Canadian dollar (CAD) terms for August 31, 2026:

Sector rotation and the software rebound

At first glance, August looked uneventful. The VIX finished at 14.9, down from 16.0 at the end of July, and every major equity index in our CAD return block was positive. The more interesting activity occurred beneath the surface. Software, energy, materials and health care outperformed, while the equal-weight S&P 500 trailed the cap-weight index. Leadership has been steadily broadening by sector this year. August saw the mega-caps regain some momentum and shrink some of that year-to-date gap. Money was not leaving the market; it was rotating within it.

Software offered the clearest example of this shift. Earlier this year, investors treated artificial intelligence (AI) as an existential threat to large parts of the industry: If AI can write code and automate workflows, why keep paying for existing applications? August then delivered a more balanced perspective. Second-quarter software earnings growth tracked at 24.4%, well above the 16.4% expected before reporting began. Results from companies like Salesforce and CrowdStrike showed that established software businesses with a customer moat can use AI to deepen their products and drive new demand. Our own experience points in the same direction—AI can compress workflows and alter pricing, but it does not automatically replace proprietary data, controls, distribution or deeply embedded customer systems. While not every software business is protected, the blanket “AI kills all software” narrative appears overly broad.

S&P 500 earnings growth

The broader earnings picture supported this market reassessment. With 97% of S&P 500 companies reported, second-quarter earnings growth reached 52% year-over-year. Although large investment gains at Alphabet and Amazon inflated the headline figure, growth remained robust at 33.8% when excluding those two companies. Ten of eleven sectors reported earnings growth². July's selloff was therefore less an earnings break than a concentrated unwind in crowded AI and momentum positions. August allowed prior laggards to catch up while semiconductor and AI infrastructure leaders consolidated and began to find their footing again.

Physical assets and gold positioning

Energy and materials carried another part of the market. Ongoing Middle East instability kept oil supply risks elevated, while Energy's second-quarter revenue growth was revised to 42.4% from 27.6% at the end of June. Gold rose roughly 10% as investors weighed inflation, government borrowing and the US Treasury's announcement of larger long-end buybacks. Within the portfolios, we added to physical gold to balance a subadvisor's Materials underweight and to improve portfolio construction. Gold can behave differently from equities and government bonds when fiscal, inflation and geopolitical risks rise together, making it useful as a diversifier rather than simply a directional commodity trade.

Fixed income and central bank dynamics

The bond market remained the unresolved part of the story. After the 30-year US Treasury yield tested 5.30%, the Treasury announced that it would double the maximum size of long-end liquidity-support buybacks from US$2 billion to at least US$4 billion per operation, effective September 9.³ The announcement briefly lowered yields, but investors quickly refocused on fiscal deficits, inflation trends, and heavy AI-related corporate borrowing.

US Federal Reserve (Fed) Chair Kevin Warsh reinforced the rhetoric on a firm 2% inflation target rather than a softer band. Is this a credibility building exercise to kick off his Fed term, or an actual view? The latest headline US CPI reading came in at 3.4% and it has been trending lower since May’s peak. The US 10-year yield ended August unchanged at 4.75%, while the 30-year yield eased only 2 basis points to 5.25% and Canadian bonds finished slightly lower.

Regional outlook

We continue to prefer Emerging Markets (EM) over EAFE regions. Economic growth in Europe and Japan remains modest, while AI investment supports EM’s technology suppliers. Consensus earnings growth estimates on the emerging market side for 2027 have steadily gained momentum this year and are currently running in the mid-20% range, while growth estimates in other areas of the world are being pared back⁴. Healthy EM  growth today is complemented by attractive valuations on both a relative and absolute basis. 

Canadian markets remained resilient despite the late-month collapse in Canada-US trade talks. Leadership in the TSX continues to be led primarily by financials and commodities, both of which benefited from global forces. 

Summary

Overall, August was a quieter month than July. Crowded positions eased, software recovered, physical assets advanced, and AI leaders stabilized. The long end of the bond market remains the pressure point, but solid earnings allowed markets to digest prior gains without retracing significantly.

Compass Portfolios Series F1 - Returns net of fees (%)

ATBIS Pools Series F1 - Returns net of fees (%)

ATB Monthly Income Portfolio Series F1 - Returns net of fees (%)

¹ Using F series returns
² Factset
³ US Treasury
⁴ Goldman Sachs Investment research and Factset