Five Questions into 2026: Discipline at the Edge of Euphoria

In their First Quarter 2026 note¹, the Global Asset Allocation Team at Fidelity Investments Canada frame the moment with characteristic restraint. “Annual market returns in 2025 looked much like they did in 2024 – stocks returned a lot, bonds returned a little and gold beat them all.”

But the symmetry ends there. The path was marked by “breathtaking volatility (Liberation Day apparently forgiven but not forgotten) and a sharp reversal downwards in the US dollar.”

Through that turbulence, the team stress continuity over theatrics: “We can’t promise that the market will offer us such strong returns indefinitely (it almost certainly won’t), but we can promise that our proven approach will not change.”

That promise — discipline over drama — is the through-line of the entire piece. What follows are five questions that define 2026. What emerges is not prediction, but positioning.

1. Is AI a Bubble?

“This is the question that will probably most determine overall market direction in 2026.”

The GAA Team do not pretend certainty. “In our view, it’s simply too early to tell whether this is the opportunity of a lifetime or the latest in a long line of historical manias.”

Here lies the tension. Three pillars of their framework “look collectively shaky – sentiment seems fairly balanced, but the macro isn’t great and valuations are very expensive.”

Yet the fourth pillar — bottom-up earnings — tells a different story. “Our equity analysts and building block portfolio managers continue to tell us that the market is underestimating the earnings power of these companies over the visible horizon – a view that our asset allocation team believes is plausible from a top-down perspective.”

The governing principle is blunt: “‘Stocks follow earnings’ is a core tenet at Fidelity.”

So long as earnings outrun expectations, “it is hard to envisage a sustained move lower in equities.”

But conviction is paired with hedging. The team:

• Maintain capital with growth managers positioned for AI.
• Short equity futures in select areas to control risk.
• Remain “moderately overweight equities on net.”
• Stay diversified across EAFE, EM, defensive managers, fixed income, commodities and alternatives.
• Remain ready to pivot: “When the facts change, we change too, guided as always by the discipline of our active asset allocation process.”

The divergence is clear: stretched valuations versus underestimated earnings power. The allocation response is measured, not maximalist.

2. What Are Your Concerns Around the U.S.?

The second question moves from micro to macro — from earnings to sovereignty.

“The AI boom and associated capital flows have been sustaining not only US stocks but also the value of the dollar.”

Strip that support away and the dollar’s vulnerability becomes visible. The team describe risks that are structural, not cyclical:

• “Increasing political interference with the Federal Reserve.”
• “The ongoing trade war to attacks on statistical agencies.”
• A posture “observationally equivalent to a policy of currency debasement.”

The consequence? Foreign creditors may “begin demanding a higher risk premium to hold U.S. assets, challenging the dollar’s long-standing status as the world’s reserve currency.”

The portfolio implications were decisive:

• “The elimination of our long-standing overweight to the U.S. dollar.”
• Diversification into “the euro and yen.”
• Increased exposure to gold “as a direct hedge against dollar debasement.”
• Sale of direct U.S. Treasury holdings.
• Reduced overall regional allocation to the U.S., with renewed focus on Canada.

Here is the structural shift: not abandoning U.S. equities, but reassessing U.S. sovereign risk.

3. Things Don’t Feel Great in Canada. Why the Optimism?

Contrarianism is not emotional; it is valuation-driven.

“A core tenet of our investment philosophy is to be drawn to markets where improving fundamentals have yet to be fully reflected in valuations or in the opinion of other investors.”

Canada fits that template.

Recent data show:

• Real GDP rebounded strongly in Q3.
• Unemployment fell to its lowest level since mid-last year.
• Business surveys reflect renewed optimism.

The team still expect deleveraging and CUSMA uncertainty to weigh on growth, but they express confidence that “2025Q2 will be the trough in economic activity this cycle.”

The Federal Budget’s “clear focus on increasing investment spending and improving productivity” strengthens that thesis, though execution risk remains.

Importantly, the team acted early: they “filled in nearly all of the underweight we have long held in Canadian assets.”

Markets are beginning to catch up.

The connection is notable: reduced U.S. exposure meets rising Canadian conviction. Currency realignment meets domestic recovery.

4. Evolving the 60/40 Portfolio

Diversification is not static.

“With the return of inflation and inflation uncertainty, we have observed the efficiency of stock/bond portfolios diminish as their correlation increased.”

When stocks and bonds move together, the classical 60/40 weakens. The response is structural diversification.

The team divide alternatives into:

• Liquid: trading strategies in stocks, bonds, currencies and commodities that complement long-only exposures.
• Illiquid: private equity and credit strategies, including real estate.

They have:

• Invested in stock selection strategies aiming for low correlation.
• Partnered with Brookfield for Canadian commercial real estate exposure.

The goal is explicit: “to evolve our portfolios to ensure we have the best tools to add value through time and help our clients reach their investment goals.”

This is not a repudiation of 60/40. It is an adaptation.

5. Geopolitical Risk

The tone shifts from analytical to philosophical.

“These may intensify, or not. They may be relevant to markets, or not. We simply don’t know at this stage.”

Instead of prediction, they emphasize framework:

• Focus “on policy rather than politics.”
• Maintain gold as a hedge.
• Stand ready to adjust “potentially quickly and materially.”

“Taken together, our framework allows us to act decidedly and with conviction, even amid uncertainty.”

Conviction without rigidity.

Performance Context

The Fidelity Global Balanced Portfolio returned 13.9% in 2025 (net of Series F fees), marking “the third straight year of double-digit gains, beating 99% of peers over that period.”

The track record reinforces the message: process over prediction.

The Hidden Threads

Across all five questions, three structural themes connect:

1. Earnings vs. Valuations

AI optimism is tolerated because earnings remain supportive — but risk is hedged.

2. Sovereign Risk vs. Corporate Opportunity

U.S. companies may thrive even as U.S. policy raises concerns. Currency and Treasury exposure are trimmed, not equities wholesale.

3. Correlation Regime Shift

Inflation has altered stock-bond dynamics. Alternatives are not decorative — they are functional.

4. Tactical Agility Anchored in Process

Repeated refrain: discipline, four pillars, readiness to pivot.

Key Takeaways for Advisors

1. Stay earnings-anchored. If AI earnings momentum persists, equity strength can continue despite valuation stretch.
2. Differentiate U.S. equities from U.S. sovereign exposure. Currency and Treasury risk deserve independent assessment.
3. Re-evaluate home bias in Canada. Improving fundamentals may not yet be fully priced.
4. Modernize diversification. Traditional 60/40 assumptions require reassessment in a higher inflation regime.
5. Hedge geopolitics structurally, not emotionally. Gold and disciplined rebalancing outperform reactive positioning.

Key Takeaways for Investors

• Strong returns are not guaranteed: “it almost certainly won’t” continue indefinitely.
• Process matters more than prediction.
• Diversification now requires more than stocks and bonds.
• Currency exposure is an active decision, not a default.
• When facts change, portfolios must change.

Final Word

The GAA Team’s closing posture is consistent with their opening promise. Markets may be euphoric, currencies may wobble, geopolitics may flare — but allocation is governed by discipline.

In a year defined by AI euphoria and sovereign unease, the most radical act may simply be process.

Footnote: 

1 Wolf, David, et al. Fidelity Investments Canada. "Five Questions into 2026." Fidelity Investments Canada ULC, 9 Jan. 2026.