As we look toward 2026, one theme stands out above all others: liquidity. It has always been a critical driver of market dynamics, but today it feels more important than ever. The reason lies in the changes taking place across both corporate and government balance sheets.

Large U.S. technology firms who were once celebrated as cash-flow machines with fortress-like balance sheets are now leveraging up aggressively to fund massive capital expenditures in

artificial intelligence

. These companies, which are major drivers of

U.S. stock market

performance, are pouring billions into AI infrastructure, data centres, and advanced computing. To finance this unprecedented buildout, they have shifted from relying on cash reserves to tapping debt markets, pushing combined interest-bearing obligations to US$1.35 trillion. This trend introduces new risks and dependencies into markets that previously relied on these companies as sources of stability.

Government deficits and short-term funding risks

Governments are following a similar path. The U.S., for example, continues to run deficits at levels reminiscent of a financial crisis. Much of this deficit financing is occurring through the issuance of Treasury bills at the short end of the curve, where rates remain much lower than longer-term maturities. While this strategy minimizes borrowing costs in the near term, it raises concerns about market saturation.

If the supply of short-term Treasury bills overwhelms market demand, repurchase, or repo, rates could spike sharply, signalling stress in funding markets. Elevated repo rates often cascade through the financial system, increasing borrowing costs for banks and dealers, tightening credit conditions and amplifying volatility in money markets. Such disruptions can spill over into broader asset classes, as leveraged investors face higher financing costs and margin pressures.

In this scenario, the

U.S. Federal Reserve

would likely have to intervene by purchasing a significant portion of the excess issuance. While this action would restore short-term liquidity, it carries profound implications including a loss of confidence in the Fed’s ability to normalize policy and a perceived return to accommodative measures. Intervention to cap repo rates might also conflict with the Fed’s stated

inflation

-fighting stance, potentially eroding policy credibility.

Fed policy dynamics, currency and hard assets

Complicating matters further are political dynamics within the Fed itself, which may see infighting between a President

Donald Trump

pick advocating for rate cuts versus governors favouring tighter policy to combat inflation.

Such a split could lead to more contentious Federal Open Market Committee meetings, slower consensus-building and increased uncertainty for markets. Investors closely watch Fed unity as a signal of policy predictability; visible discord could amplify volatility in rates and risk assets.

Bond markets, however, are unlikely to remain passive observers. We at TriVest Wealth Counsel expect them to push back against excessive easing, which could result in a steepening yield curve and signalling expectations of higher long-term rates and concerns about inflation and fiscal sustainability.

This environment would likely weaken the U.S. dollar and accelerate currency debasement, a trend that historically benefits hard assets such as gold and silver. Both metals have already delivered strong performance in 2025, so some of this optimism may be priced in. Nevertheless, we think this trade isn’t over until we see a reversal in U.S. policy, which may not happen until after the midterm elections.

Canadian market perspective

Turning to Canada, the

Bank of Canada

faces a delicate balancing act. It likely does not want to cut rates further, preferring to allow the Fed to catch up in order to preserve currency stability. However, while recent economic indicators are showing signs of surprising resiliency, we think they are masking the potential for recession risk, declining housing prices, and limited impact from Ottawa’s top-down approach to economic management. In our view, cutting taxes and easing regulatory burdens would be far more effective than infrastructure spending. In the meantime, those with protective moats and strong balance sheets to support dividends will likely be able to weather any near-term economic weakness.

Fixed income and alternatives

Our stance on fixed income remains cautious. We do not see compelling upside in traditional bonds as long as government spending remains elevated. In fact, if fiscal expansion persists unchecked, we could face an emerging sovereign debt crisis. Early warning signs are already visible: Companies such as

Microsoft Corp.

are issuing debt at yields lower than those on U.S. Treasuries of comparable maturity, which is a distortion that underscores market anxiety about sovereign credit risk.

Instead of conventional bonds, we continue to favour structured notes with defensive features. These instruments allow us to navigate volatility while preserving upside potential.

Key risks and staying disciplined

Several risks warrant close monitoring as we move into 2026: U.S. midterm elections, Federal Reserve actions and internal dynamics, tech-driven private credit markets and geopolitical stability in regions such as Ukraine, Taiwan, and Venezuela. Trade negotiations, including potential shifts in the

Canada-United States-Mexico Agreement

toward bilateral agreements, could introduce additional complexity. Finally, sovereign debt funding pressures represent a systemic risk that could reverberate across global markets.

After three consecutive years of strong gains, prudence is essential. That said, one critical lesson from recent history stands out: Avoid the temptation to go entirely to cash. Those who did so after 2022 missed out on substantial gains over the past three years. Timing the market is notoriously difficult and sitting on the sidelines can be just as risky as overexposure.

Our guiding principle remains unchanged: avoid excessive risk, focus on companies with durable competitive advantages and reliable dividends, and manage duration exposure across both equities and bonds. We continue to stick with our core strategy of pairing every high-risk position with a low-risk counterpart. Our positions are therefore tempered somewhat, and we would be happy to achieve high single-digit returns after a double-digit outcome in 2025 as a disciplined objective. Markets have a way of surprising even the most seasoned investors, so maintaining flexibility and resilience is paramount.

In short, this is not the time to swing for the fences, it’s the time to protect the plate. Stay patient, stay balanced, stay invested and let discipline do the heavy lifting.

  • The Federal Reserve’s rate cut was a clear signal to investors
  • Stock markets, like people, operate beyond our control. What is our task then?

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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