Scotiabank's Portfolio Strategy team released its August Monthly Chart Book, and several points in the report stand out.

The first is earnings, which remain a major reason the market has performed so well. So far in Q2, results have been strong, with an aggregate beat of 13%. About 85% of companies have topped estimates, and the median beat has been 5.9%. Revenue growth is running at 13% year over year, while EPS growth is up 38%. The strategists note, however, that the headline EPS figure is "boosted by Alphabet's unrealized gains on its stakes in Anthropic and SpaceX."

The most striking section of the chart book focuses on the AI trade, because it shows how quickly the market's focus has shifted from adoption to funding and balance-sheet impact. Scotiabank says consensus now expects MAG-7 capital expenditures to exceed $1 trillion over the next 12 months, while free cash flow is rolling over as spending increases. The more important point, in the bank's view, is leverage: once hidden off-balance-sheet obligations are included, the AI basket's net debt to forward EBITDA has risen to 2x. The report's framing is direct: U.S. tech benefited for 15 years from an asset-light, no-debt model, and "this model is morphing," which "could lead to higher volatility (but not necessarily the end of the trade)."

Scotiabank remains slightly overweight U.S. tech on the back of earnings beats and positive revisions, which helps explain why the bank is not turning bearish despite its caution on leverage. The bank notes that Tech leads S&P 500 forward EPS revisions at +18% over the past three months. Even so, it says the debt is real and growing, and that at some point it will matter, with the market eventually needing real returns on AI.

The report also addresses the dollar, a key input for both risk assets and commodities. Scotiabank says the DXY has fallen below 100 after U.S. and Japan intervention to support the yen, and it believes the downtrend can continue. If that proves correct, the bank says it "could mark the end of rainy days for gold," which has pulled back from a $5,500 peak to a floor near $4,000 and now trades a full standard deviation below its 200-day average. Gold surged $165 today, a move that fits Scotiabank's view that a stretched pullback and a peaking dollar provide a favorable setup for the metal.

In Canada, the TSX outperformed in July, rising 2.3% in U.S. dollar terms, helped by a 6.9% surge in Energy. The earnings backdrop is also described as strong. Scotiabank revised 2026 TSX EPS up to C$2,104, which implies growth of 28.9%, and sees another 11.4% increase in 2027. The index trades at 15.7 times forward earnings, a 21% discount to the S&P 500, compared with a five-year median discount of 29%. TSX small caps are up 51.2% year over year on a total return basis and still trade at 13.9 times forward earnings versus a 17.2x average.

The bank also highlights a chart pairing U.S. software stocks with Canadian names it says are being weighed down by AI disruption fears, including CSU, SHOP, OTEX, TRI and others. Scotiabank describes the setup as speculative and says, "time will tell if the relationship holds," but adds that with IGV moving higher and the Canadian basket lagging, it is a relationship worth watching.

Finally, the report argues that consumer confidence is not the key indicator to follow. Scotiabank says it has been falling for years across all income groups, even as Redbook same-store sales accelerate despite tariffs and elevated gasoline prices. It describes the K-shaped economy as real and unfortunate, adding that "the 'haves' continue to do the heavy lifting" and are unlikely to change course. The bank says this matters for investors in dollar stores or McDonald's, but not for most of the S&P 500.