Four things for 2026

The economy has been hard to read over the last few years, with many calls for recessions but with stock markets still rising, increasingly driven by the growth of AI.

The economy tends to result in stock market selloffs in two main ways: 1) the economy cools off too much, indicated by falling GDP and rising unemployment, which typically reduces corporate profits; or 2) the economy heats up too much, the central bank is forced to raise interest rates to quell inflation, and the stock market declines because there’s less lending and spending in the economy.

Investors have become increasingly concerned about the second type of selloff, where a peak in the business cycle could lead to a sharp decline in AI and other high-risk investments. This creates a risk for investors if they believe the economy has peaked and start reducing their positions, only to find that the economy has not peaked.

In this context, it’s important for investors to get an objective sense of whether the economy is actually peaking. Two ways to do this are with the copper-gold ratio and the Purchasing Managers’ Index. Let’s explore how investors can use these indicators to make sense of the economy and what it means for stocks.

Even with the rapid growth of technology, one of the key indicators of the business cycle is decidedly old-school: the copper-gold ratio.¹

• Copper is an industrial metal. Its price increases when companies are producing more electric vehicles, industrial equipment, circuit boards or solar panels.
• Gold is a monetary metal. Its price increases when investors have concerns about geopolitical stability, government debt and inflation.

The copper-gold ratio trends up when copper prices increase more than gold prices. It trends down when gold prices increase more than copper prices.

This contains some important insights for investors. Since copper is used for industrial equipment and other capital goods, businesses don’t just buy copper on a whim; they buy copper when they expect strong growth for some time to come.

Peaks in the copper-gold ratio may indicate peaks in the business cycle and surging demand for high-risk assets such as tech stocks and Bitcoin, the most recent example of which was in 2021. But if the copper-gold ratio is flat or declining, it’s less likely the business cycle has peaked. If pundits or influencers are talking about how the economy is overheating but the copper-gold ratio is not trending up, it’s worth paying attention to what the copper-gold ratio is saying.

Another tried-and-tested economic indicator is the Purchasing Managers’ Index (PMI).² The PMI, started in 1948, is the longest-running indicator of business confidence in the United States. The PMI survey is sent monthly to purchasing managers in the manufacturing sector, asking them questions about new orders, employment, production, supplier deliveries and inventories. The survey asks purchasing managers to identify whether conditions are better, worse or the same, compared to the previous month. The PMI score can range from 0 to 100. A PMI score under 50 indicates contraction in the economy, while a score above 50 indicates expansion.³

The PMI has mostly been under 50 since September 2022, although the economy and stock market have performed quite well. The PMI typically peaks around 60 to 65, when the economy overheats, the Federal Reserve raises interest rates to cool inflation and the business cycle slows down.

Like the copper-gold ratio, the PMI shows sustained demand, since manufacturers don’t commit to more inventory and production on a whim; they do this when they expect sustained growth. Also like the copper-gold ratio, the PMI can’t be easily influenced by governments or central banks to make the economy look better than it is. Investors can use these indicators to gauge the underlying risk of a business cycle peak and stock market decline, which may be relatively low if these indicators are at moderate levels and increasing steadily.

The copper-gold ratio and the Purchasing Managers’ Index are our first two things to consider for 2026, to help equity investors assess whether the economy is peaking.

Now let’s turn to our third thing to consider for 2026: whether monetary policy could lead to a melt-up in high-risk assets like AI stocks.

Investors have paid close attention to the prospect of a U.S. rate-cutting cycle, which seemed to start in fall 2025 but is now up for debate. Many investors have not paid as much attention to the Fed’s balance sheet, notably its plan to end quantitative tightening in December 2025. This matters for investors who hold high-risk assets, such as AI stocks.

In order to explain quantitative tightening (QT), we first need to explain quantitative easing (QE). When the Fed does quantitative easing, it creates money out of thin air and uses the newly created money to buy government bonds from banks. This increases bank reserves at the Fed. When banks have more reserves at the Fed, they lend more and create new credit in the economy. This can be bullish for stocks and other risk assets, a rising tide of liquidity that lifts many boats in the economy. For further details on QE, refer to the notes section.⁴

Quantitative tightening is the opposite. The Fed allows the bonds it has bought from the banks to mature, without buying new bonds. The Fed receives principal payments on the bonds from the Treasury and removes these funds from the financial system. This reduces bank reserves at the Fed. When banks have fewer reserves at the Fed, they lend less and create less new credit in the economy. This can be bearish for stocks and other risk assets, although stocks managed to rally in 2023 to 2025 while QT was in effect. For further details on QT, refer to the notes section.⁵

When the Fed ends QT, this does not mean QE starts right away. In between, there may be a period of “stealth QE,” where the Fed and Treasury do not say they’re doing QE but do it anyway through technical adjustments, such as issuing shorter-term Treasury securities, which tend to be bought by banks and increase liquidity; loosening borrowing terms in the overnight lending market, which increases bank reserves at the Fed; or spending more freely from the Treasury General Account, the government’s chequing account at the Fed.

Will the Fed move from stealth QE to outright QE? This is a key point for investors to watch. The most recent example of this was in the second half of 2020, as the Fed unleashed QE, creating massive liquidity in the financial system to help the economy recover from the pandemic. This resulted in a sharp recovery for U.S. tech stocks and a major rally for Bitcoin.

Rate cuts matter — but for high-risk assets like AI stocks, the expansion of the money supply or QE matters even more. Investors holding high-risk assets should pay close attention to the meetings of the Federal Open Markets Committee (FOMC)⁶ and insights on interest rates from CIBC Economics.

Let’s wrap up with our fourth and final thing to consider for 2026: whether the U.S. dollar could continue declining.

U.S. federal debt is $38 trillion as of November 2025⁷, with interest payments on the debt now exceeding defense spending, a watershed moment for a great power.⁸ The U.S. government is unlikely to cost-cut its way out of this problem: the Department of Government Efficiency (DOGE) was unable to find any long-term reduction in federal government spending. As a result, President Trump and Treasury Secretary Bessent have focused on “running the economy hot,” which means cutting interest rates aggressively and hoping the economy can grow its way out of its massive debt. These rate cuts, if implemented by the Federal Reserve, would reduce global demand for the U.S. dollar relative to other currencies. This has already happened in 2025, which saw one of the largest declines in the U.S. dollar against other currencies in recent decades.⁹ In addition, the safe-haven role of the U.S. dollar has weakened, not only by rising deficits and debts but also by the weaponization of the U.S. dollar against other countries. This helps to explain why global central banks have been buying gold hand over fist in recent years.

Traditionally, Canadian investors have tended to hold U.S. assets with unhedged exposure to the U.S. dollar. If Canadian investors believe that the Federal Reserve will cut rates aggressively in 2026 and that this would make the greenback relatively less attractive to global investors, they may consider hedging some of their U.S. dollar exposure.

Is the economy peaking?

The economy has been hard to read in recent years. In particular, predictions that the economy is about to peak can be risky for equity investors, since they can be shaken out of their positions too early. To manage this risk, investors may consider assessing the business cycle through indicators that show sustained demand and can’t be easily influenced by governments or central banks: the copper-gold ratio and the Purchasing Managers’ Index. If both are increasing steadily at moderate levels, the risk of a business cycle peak and stock market crash may be relatively low.

Could AI stocks melt up even more?

Interest rates have taken centre stage as the Federal Reserve flirts with a rate-cutting cycle. For investors in high-risk assets like AI stocks, the Fed balance sheet matters even more than the level of interest rates. QT is ending in December 2025, likely followed by “stealth QE” and the possibility of outright QE later in 2026. The most recent burst of QE, in 2020, resulted in major rallies for tech stocks and Bitcoin.

Will the U.S. dollar continue declining?

The U.S. dollar dropped significantly against global currencies in 2025. At the same time, the safe-haven role of the dollar has diminished, which helps to explain why global central banks have been buying gold. If Canadian investors believe that the Federal Reserve will cut rates aggressively in 2026 and that this would make the greenback relatively less attractive to global investors, they may consider hedging some of their U.S. dollar exposure.

¹ Copper-gold ratio: Data Opens a new window.

² Purchasing Managers’ Index: DefinitionOpens a new window.

³ Purchasing Managers’ Index: DataOpens a new window.

⁴ Quantitative Easing (QE): What it is and how it works Opens a new window.

⁵ Quantitative Tightening (QT): What it is and how it works Opens a new window.

⁶ Federal Reserve: Calendar of meetings Opens a new window.

⁷ U.S. national debt Opens a new window.

⁸ U.S. debt interest payments now exceed defense spending Opens a new window.

⁹ Will the U.S. dollar keep falling?Opens a new window.