What’s a Trillion Dollars anyway?

Points in Time – JULY 2026 – ISSUE

An unprecedented wave of capital has poured into Artificial Intelligence and next-generation tech in recent years. Private investors have committed record sums to companies like OpenAI and Anthropic, while public market enthusiasm has broadened into memory chipmakers, such as Micron (up 758.8% over the past 12 months) and AI infrastructure. Even well-established Mega-Cap Tech firms are raising massive amounts of capital. For instance, Alphabet (Google’s parent company) raised $85 billion in equity recently, while other companies, like Microsoft, have tapped the bond market in a significant way (AI-related bond issuance has already jumped to $270 billion so far this year).

Watching this flood of money reminded us of a core concept from one of the best investment books we have read in recent years, Capital Returns by Edward Chancellor. A key learning from Chancellor’s work is that investors can gain immense insight simply by watching the capital market cycle – paying close attention to where investment dollars are flowing and, more importantly, what happens after they arrive.

The capital cycle operates on a fundamental mechanism. When money floods into an industry, companies rush to expand, often excessively, which creates the seeds of its own downturn. Overinvestment leads to overcapacity and crushed profit margins down the road – creating the exact conditions that ultimately force capital to flee. Only after that excess is purged can discipline return to rebuild profitability, much like how the dot-com capital flight of the late 1990s cleared the stage for today’s most profitable tech giants.

While the capital cycle does not tell us exactly when a market will peak or bottom, it can help us understand what inning of the game we are in.

A Bird in the Hand, or a Trillion in the Bush?

Aesop famously said that “a bird in the hand is worth two in the bush”. If we were reasonably sure there were two birds in the bush, and we were good bird catchers, we might take that trade. If there were three or four, perhaps even more so.

But if someone promised us a trillion birds in the bush, we should question whether that bush had somehow bypassed the laws of physics – or whether we were simply being sold a story.

Bringing this back to the markets, the word “trillion” has become almost routine in investor discussions. Take SpaceX as an example, which at its IPO valuation on June 12 of $1.75 trillion, was the eighth largest company in the world by market capitalization (Figure 1).

To deliver a 10% return for investors at this valuation, the company needs to generate $175 billion of shareholder value each year, an amount that exceeds annual profits of companies like Apple, Microsoft, or Saudi Aramco. And if profits are delayed, as they most certainly will be, that hurdle compounds rapidly. For example, if shareholders receive nothing this year, the required return grows to $193 billion next year ($175 billion plus a 10% return). If there are again no returns next year, that hurdle rises to $212 billion the following year, and so on.

Figure 1: A trillion dollars ain’t what it used to be!

SpaceX is currently generating operating losses, and while this isn’t automatically a deal-breaker as investors pay for future growth, the odds and potential returns must justify it. To be fair, SpaceX has no shortage of growth ambition: AI compute, orbital data centers, asteroid mining, an industrial base on the Moon and a “permanent human colony on Mars with at least one million inhabitants” …yesterday’s science fiction is today’s latest public company.

SpaceX estimates its total addressable market at nearly $30 trillion, more than 20% of global GDP (although not all its opportunity is just confined to Earth!). With OpenAI and Anthropic likely to command similarly large valuations and market estimates, a small handful of companies could soon collectively claim addressable markets representing a significant share of the global economy.

Perhaps they will capture them. But the bar isn’t just high; it is sitting somewhere in orbit. These companies will need exceptional growth, flawless execution, and extraordinary profitability to justify what investors are being asked to pay today.

Using Stock to Buy Growth

Our SpaceX example does not mean the company must organically earn $175 billion in annual profits right away. There is another potential path: use a highly valued stock to pursue acquisitions.

A company priced at around $2 trillion has a very strong currency. If the market is willing to value its shares at that level, the company can, for example, issue just 5% more stock and have nearly $100 billion to spend on acquisitions. It could buy other businesses, fold their earnings to its own, and appear to grow into its valuation faster.

This can be a rational strategy. If a company’s stock is truly worth what the market says it is, using it to buy attractive businesses can create value. But if the stock is worth less than the market price, the dynamic shifts from wealth creation to wealth transfer.

Economically, value has been transferred from one shareholder group to another. That is a strategy that depends less on business economics, and more on the continued willingness of the next investor to accept the same expensive currency, which is rarely sustainable for long.

The Ninth Inning: Why Discipline Beats FOMO

Money can certainly be made in these securities. The SpaceX IPO has reportedly created thousands of employee millionaires, while early venture investors are estimated to be sitting on tens of billions of paper gains.

We understand the excitement and the fear of missing out (FOMO). But having missed the early hours of the party before the company went public, it’s no surprise that many investors do not feel compelled to join it now as the stock is trading below its IPO price. The cover charge has become expensive. The opportunities may be phenomenal, but so are the price tags. Although we never know when a capital cycle will end, it does seem that this one is getting closer to the ninth inning for these types of stocks than the first.

This doesn’t mean that there aren’t investment opportunities in the market or even that SpaceX itself won’t be an opportunity down the road if the price is right. However, it does mean that this is no time to throw caution to the wind. Each opportunity needs to be vetted closely against objectives and in line with long-term goals. It can be easy to get caught up in the hype of an IPO like SpaceX, but this is the exact moment where advisors can help clients maintain discipline and focus on long-term thinking.

Source: FactSet, Morningstar

---

Canadian Equity

Scott Blair, CFA 
Head Portfolio Manager

Watching

The Canadian equity market returned 7% in Q2 of 2026, bringing year-to-date gains to approximately 11%. While market performance remained positive, the sectors and themes driving performance shifted meaningfully from the previous quarter.

The Energy and Materials sectors, which performed well in Q1 of 2026, were among the largest detractors in Q2. An interim Memorandum of Understanding between the U.S. and Iran, signed on June 17, helped ease concerns about further conflict escalation in the Middle East, reducing some of the geopolitical risk premium embedded in commodity prices. For example, crude oil, which traded above US$110 per barrel during parts of April and early May, ended the quarter at approximately US$70 per barrel. As a result, the Energy sector declined by 5% during the quarter.

The Materials sector also underperformed, falling 12% in Q2. Gold prices trended 14% lower in U.S. dollar terms as geopolitical risks moderated and investor sentiment improved, reducing demand for traditional safe-haven assets. Weakness in other commodities, along with declines in stocks that had initially benefitted from concerns surrounding the conflict in Iran, such as Nutrien and Methanex, further weighed on sector performance.

In contrast, the Financials sector was the primary driver of market returns in Q2, gaining 24%. Canadian banks led the sector with returns of 29%, supported by improving economic sentiment, expectations for stronger loan growth and capital markets activity, stable credit conditions, and continued capital returns through dividends and share buybacks.

Thinking

Any progress toward de-escalation in the Middle East is supportive of global economic stability and market confidence. However, a lasting resolution still appears some way off, and a return to more normalized supply chains and commodity markets is likely to be gradual. While tensions have eased, a comprehensive agreement between the U.S. and Iran had not been reached as of quarter-end.

In energy markets, despite the decline in geopolitical risk premiums, it is somewhat surprising that crude oil prices retraced to roughly US$70 per barrel in the quarter, near their pre-conflict levels. This has occurred despite ongoing draws in crude and refined product inventories, and continued disruptions through the Strait of Hormuz. The major offset has been weaker-than-expected Chinese crude import demand, which remains below pre-conflict levels and may be contributing to a more balanced supply demand environment than anticipated. The timing and magnitude of a recovery in Chinese demand remains uncertain, reinforcing the long-held view that short-term commodity price forecasting is inherently difficult.

Despite this volatility and uncertainty, the Energy sector continues to present attractive opportunities. Many high-quality businesses held in the portfolio have demonstrated the ability to generate significant free cash flow across a wide range of commodity price environments and continue to offer attractive risk-adjusted returns at current valuations.

Turning to Financials, the major Canadian banks have indeed been stellar performers. However, valuations have reached historically elevated levels. While these companies continue to offer attractive dividend yields and relatively resilient earnings streams, it may not be prudent to extrapolate this quarter’s performance into the future.

Doing

Earlier in the quarter, positions were increased in four technology holdings: Constellation Software (CSU), CGI (GIB.A), Open Text (OTEX), and Descartes Systems (DSG). These companies have faced pressure due to fears that advances in artificial intelligence could disrupt aspects of their businesses. In our view, valuations across each of these holdings are highly compelling.

Conversely, Boyd Group Services (BYD) experienced a sharp decline at the end of Q1 and into Q2. The recent earnings volatility appears to have been largely driven by temporary weather-related factors. At current levels, valuation appears compelling, and the company is positioned to execute well on both organic growth and margin expansion opportunities over the coming quarters. The position was increased in late May at approximately $149 per share.

Finally, the position in Agnico Eagle Mines (AEM) was increased in early June at approximately $230 per share. Exposure to precious metals remains underweight relative to the benchmark. The combination of a wide range of potential macroeconomic and geopolitical outcomes, along with the recent pullback in the sector, creates an attractive opportunity to further reduce that underweight position.

Source: FactSet

---

U.S. Equity

Lilly Tzvetkova, CFA
Senior Portfolio Manager,
U.S. Equities

Watching

Despite a challenging start to the quarter, U.S. equities finished Q2 on a strong note, with major indices posting double-digit gains.

The quarter began amid an escalating conflict in Iran, rising oil prices, and concerns that higher energy costs could reignite inflation just as the Federal Reserve appeared to be moving closer to easing monetary policy. As the quarter progressed, however, markets increasingly looked through these risks and refocused on the dominant theme of the current cycle: artificial intelligence (AI). Continued enthusiasm surrounding AI was evident not only in public equity markets, but also in private markets with the recent SpaceX IPO and anticipated future offerings from companies such as Anthropic and OpenAI reinforcing investor appetite for AI-related assets.

From a sector perspective, Information Technology was unsurprisingly the standout performer, posting returns upwards of 30%, roughly double the next best sector, Industrials. Within technology, semiconductor equipment and memory companies emerged as key beneficiaries of the AI investment cycle, given their direct exposure to ongoing AI-related capital expenditures. Memory manufacturers Micron (+241.7%) and SanDisk (+257.9%) were among the strongest performers in the U.S. market. Limited exposure to this segment detracted from the portfolio’s performance. As for laggards, Energy was the worst performing sector, declining nearly 15% in the quarter and reversing some of the gains achieved earlier in the year.

The most recent U.S. earnings season was exceptionally strong, with earnings growth reaching 28% year-over-year, more than double the 13% growth expected at the start of the reporting period. While technology sector earnings were the bright spot, earnings across the board were strong. During the quarter, evidence continued to accumulate that the U.S. economy remains on solid footing, with employment, consumer spending, and corporate earnings all proving resilient, further supporting market sentiment.

Thinking

One of the key questions facing investors is whether the current AI investment boom represents excess or opportunity. History suggests that transformative technologies often produce elements of both. The railroad boom, electrification, and the internet each attracted enormous amounts of capital. While many individual projects failed, the broader economic benefits ultimately proved far greater than investors initially imagined. The challenge lies in identifying where value will accrue.

While much of the market remains focused on the companies building AI infrastructure, there is growing evidence that some of the longer-term beneficiaries may be the companies applying the technology. Across the portfolio, businesses such as Microsoft, Alphabet and Amazon are already monetizing AI through cloud services, software and enterprise solutions. Beyond the technology sector, AI has the potential to improve productivity and reduce costs at some companies held in the portfolio such as McKesson, UnitedHealth Group, and Deere. McKesson has already discussed expanding the use of AI and automation throughout its distribution network to reduce manual handling in certain fulfillment processes and improve supply-chain efficiency. UnitedHealth Group has invested $1.5 billion in AI, with initiatives targeting $1 billion cost savings in 2026. Deere continues to deploy AI and computer vision technologies designed to help customers reduce fertilizer and herbicide usage while improving crop yields.

Investor enthusiasm surrounding AI has also contributed to increased valuation dispersion across the market. Periods characterized by dominant market narratives often reinforce the importance of maintaining discipline around valuation analysis. The U.S. equities portfolio management team remains disciplined in its approach and are unwilling to chase momentum when prospective returns do not justify the valuation being paid. The focus remains on identifying those second-order beneficiaries of secular trends such as AI, while they still trade at reasonable valuation.

Doing

Identifying opportunities to reallocate capital from positions where valuations appear increasingly full into businesses where long-term return potential remains underappreciated was the focus in Q2.

Following strong performance, several positions were trimmed where valuations had become more demanding or where position sizes had grown meaningfully. This included trimming energy holdings such as Occidental Petroleum and Cheniere Energy following their rally earlier in the year. Profits were also taken in Nvidia, Fabrinet, Alphabet, and Intel. In the case of Intel, the position was reduced on two separate occasions as the shares appreciated significantly and the risk/reward profile became less compelling. The proceeds were redeployed into Copart, Deere and UnitedHealth Group with better opportunity at current prices.

Ultimately, the investment approach remains unchanged. Rather than attempting to predict every geopolitical development, interest-rate decision, or technological breakthrough, the focus remains on owning high-quality businesses with durable

competitive advantages, capable management teams, and attractive long-term economic characteristics, while maintaining discipline around valuation. The approach is viewed as a prudent way to compound capital through an environment that continues to present both uncertainty and rich opportunity.

Sources: JPMorgan, Morgan Stanley, Bloomberg, FactSet

---

International Equity

Ric Palombi, CFA
Senior Portfolio Manager,
International Equities

Watching

Market volatility, particularly in AI-linked stocks, remains intense. Samsung Electronics recently reported second-quarter profits of US$58.4 billion, significantly exceeding market expectations, yet its shares declined 7% on the day. The message is clear: when expectations are exceptionally high, strong results alone may not be enough to move the stock higher. This trend is being monitored closely given the portfolio’s direct exposure to the sector through Samsung Electronics, ASML Holding N.V., and Infineon.

This raises a broader issue: is the market experiencing an AI bubble, or is it simply moving through a powerful cycle with elevated expectations? More precisely, are we dealing with a bubble in stock prices, capex and earnings, or merely a normal cyclical correction? The answer may define the market’s next phase, but certainty is hard to find.

Thinking

The conflict in the Middle East continues to be extremely volatile with brief lulls in hostility followed by renewed violence. Earlier this year, the expectation was that any conflict would be brief and would have only a limited impact on oil prices.

That assumption quickly changed. As the conflict expanded and persisted longer than expected, forecasts for oil prices at $200 per barrel began to appear. The narrative shifted towards concerns that Iran held the upper hand, production facilities had been damaged, and supply disruptions would take years to resolve. Fast-forward to the end of the quarter, and oil prices were near $70 per barrel, while discussions returned to the prospect of an oversupplied market. This is a remarkable narrative change in just a few months that has changed yet again.

The takeaway is that even highly visible events can be extremely difficult to forecast. The direction, duration, and outcome of the conflict is hard to predict, and so are oil prices.

A similar challenge exists in assessing the probability of an AI-related market bubble. There are simply too many moving parts and variables to stake a firm claim with confidence. That is why, in good times and bad, we rely on our investment process to navigate outcomes that are “unknown and unknowable.”

This does not imply that risks should be overlooked. Valuations and expectations in certain areas appear stretched. Samsung Electronics, for example, has risen approximately sixfold over the past 18 months. At the same time, well-regarded companies such as SAP have declined on fear, and despite continued earnings growth. Novo Nordisk, once a market darling, has also fallen sharply, driven by a combination of sentiment, positioning, and some company-specific missteps that, while not minor, do not appear fatal.

Rather than attempting to predict market tops, bottoms, or market turns, the focus remains on allocating capital where the risk/reward profile is attractive. The goal is not to predict every outcome, but to identify potential opportunities at inflection points where perception, fundamentals, and valuation begin to diverge. These tend to be the moments when disciplined investors can act before the broader market fully recognizes the shift.

Performance: Samsung vs Novo vs SAP

Doing

Weakness across the healthcare sector as well as and stock-specific weakness created an opportunity to establish a position in Novo Nordisk (Novo), a Danish pharmaceutical leader. The company has delivered a decade of double-digit growth and consistently strong returns on capital. Alongside Eli Lilly, Novo leads the oligopolistic diabetes market and shares control of obesity, one of the fastest-growing subsectors within the pharmaceutical industry.

Investors underestimate Novo’s innovation, brand strength, and GLP-1 manufacturing (Wegovy) complexity. Its capital investments, vertical integration, and supply chain scale create first mover and cost advantages that help protect against competition. At 15x earnings, compared with roughly 30x earnings for Eli Lilly, and with new management team and reset expectations, the risk/reward profile seems attractive.

Source: Bloomberg

---

Fixed Income

Malcolm Jones, CFA
Senior Portfolio Manager,
Fixed Income

Watching

Numerous factors are contributing to uncertainty in the global economy. US tariffs have changed in form but increasingly appear to be a more permanent feature of the economic landscape. This, combined with ongoing conflicts and active war zones, have disrupted long-established trade routes. In the near term, such disruptions can weigh on economic growth and contribute to inflationary pressures. Over the longer term, however, new trade relationships and opportunities may emerge.

The U.S. decided not to renegotiate the Canada-United States-Mexico Agreement (CUSMA/USMCA) this year. While this decision leads to continued uncertainty, it is arguably preferable than negotiating an unfavorable agreement.

Despite these uncertainties, the Canadian yield curve remains at a reasonable level and has a reasonable slope. Inflation in Canada remains slightly above target but is showing signs of improvement. Inflation in the U.S. has proven more stubborn (see chart). Economic growth has been slower than it might otherwise have been, but overall economic performance remains acceptable.

Taken together, these conditions point to a relatively stable fixed-income market. While stable may appear unexciting, it is not necessarily a bad thing.

Thinking

The U.S. has stepped back from renegotiating the CUSMA. One possible explanation is that the U.S. did not feel it was in a position to secure an advantage through negotiations. It is also worth recognizing that the negotiating teams in both Canada and Mexico are generally viewed as much stronger than they were during the 2016 North American Free Trade Agreement (NAFTA) negotiations.

It’s important to note that the CUSMA remains in effect until 2036. The current decision simply delays the review process by an additional year, leaving the existing framework in place. While this modestly increases uncertainty across the broader economy, it does not create any immediate disruption to interest-rate markets.

U.S. Liberation Day tariffs have been halted by the courts but were immediately replaced by tariffs enacted under different legislation. While congressionally approved tariffs may be more defensible from a legal standpoint, there are many paths the President can take to impose tariffs. Indeed, future administrations may struggle to remove tariffs since doing so would require replacing the associated revenue through increases on more visible taxes.

As a result, it is reasonable to expect the U.S. to maintain a relatively high tariff structure for an extended period. This causes disruption to established trade routes and can reduce overall economic efficiency as global supply chains adjust. Economic theory generally suggests that tariffs contribute to higher prices for consumers in the country imposing them. Recent data indicates that U.S. inflation is seeing upward pressure. This serves to put greater upward pressure on U.S. rates than might be seen in the rest of the world.

The Bank of Canada has acknowledged the challenges associated with the current environment.

Various factors are contributing to economic uncertainty including wars in Ukraine and the Middle East, trade disruptions, tariff pressure, and an unpredictable U.S. administration. It is difficult to map out how the resolution of this uncertainty will split between economic growth disruption and inflation.

The Bank of Canada has reiterated its bias to fighting inflation. Recent economic data suggests that inflationary pressure is dissipating in Canada. Overall, the Canadian yield curve appears broadly consistent with this outlook, and significant shifts in the overall curve are not currently anticipated.

Corporate bond spreads have been narrow throughout the year. With that said, investor demand for new issues remains robust, and corporations have generally had sufficient cash flow to meet their debt obligations. Spreads are largely unchanged year to date, and unless there is a sharp deterioration in economic activity, they are unlikely to move materially for the rest of the year.

While certain issuers, primarily within the non-investment-grade segment, have encountered difficulties, these challenges have generally been company-specific rather than reflective of broader economic conditions. Significant movement in corporate spreads, is therefore not anticipated. However, portfolio duration has been reduced, reflecting the view that downside risks currently outweigh upside surprise.

Doing

Opportunities to capture capital gains in the Canadian fixed income market appear to be limited. Expectations are for relatively limited movement in both the broad curve, and in credit spreads.

Given this outlook, the portfolio is positioned to try to capture some extra interest income. Duration is slightly overweight in government bonds, and slightly overweight in credit with an emphasis on shorter-duration credit bonds. The positioning is intended to enhance overall interest income while maintaining exposure to a relatively stable fixed-income environment.

Source: Bloomberg

National Bank Financial – Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under licence by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly-owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA).

The securities or sectors mentioned in this letter are not suitable for all types of investors and should not be considered as recommendations. Please consult your Wealth Advisor to verify whether the security or sector is suitable for you and to obtain complete information, including the main risk factors. Some of the securities or sectors mentioned may not be followed by the analysts of NBF.