by Mike Archibald, Portfolio Manager, AGF Investments
The main drivers of the Canadian equity market—banks, commodity companies, industrials and technology—continue to be well positioned moving forward.
There is a lot of debate in the financial media about the ascent of the U.S. stock market in 2025, and whether those moves are warranted. But equally compelling is the story that has unfolded north of the U.S./Canada border, where the S&P/TSX Composite Index is outperforming the S&P 500 Index through the first 11 months of 2025.
Is there any more airspace for Canadian stocks after an exceptionally strong year? We believe so. In fact, our view is that the outlook for Canada is more robust than many market participants are forecasting. Earnings growth should continue to be solid, the Canadian government is likely to provide significant fiscal stimulus, and the likelihood of a renewed trade deal with the U.S. should help propel Canadian stocks to another positive year. Can investors expect another year of 20%-plus returns? Unlikely. Yet the main drivers of the Canadian equity market—banks, commodity companies, industrials and technology—continue to be well positioned moving forward. They all have tailwinds that should see the S&P/TSX put up another green year in 2026.
One of those tailwinds has been the Bank of Canada’s (BoC) interest rate policy, but after several cuts in 2025 to stimulate the economy and respond to falling inflation, we believe the path of future cuts looks much shallower. Our base case is that there will be a small drop in rates in 2026 or an extended period of no change. This still matters for markets, however, and particularly for financial institutions. If rates fall only marginally, banks still stand to make decent profits in 2026; on the other hand, big moves in either direction (much lower or much higher rates) could change the outlook. But we expect a year of relative rate stability, which is generally a plus.
In fact, our view is that the outlook for Canada is more robust than many market participants are forecasting.
On the macro level, the Canadian economy should grow a bit faster in 2026 after a slow 2025. Expect modest growth, not a big boom. Both monetary and fiscal stimulus should provide some fuel to see a modest uplift in growth—enough to help businesses, but still below Canada’s long-term trend. Meanwhile, with the path of rate cuts less aggressive, along with the likelihood of more rate cuts from the U.S. Federal Reserve, we should see the Canadian dollar strengthen slightly. Modestly higher oil, copper and gold prices should also be a tailwind for the loonie, but expect ups-and-downs rather than a steady trend.
This benign environment should have a positive impact on earnings. Overall, we expect corporate profits for the S&P/TSX Composite Index to rise in the high-single-digit to low-double-digit level—somewhere in the range of eight to 12%. Government stimulus, an improving consumer backdrop due to lower interest rates, and a resolution to trade tariffs should all help Canadian companies see improved growth trends. Most large-cap, Canadian-listed companies remain in a sound financial position with strong balance sheets and excess capital for investment.
Hear more about Canadian Equities in the Inside Perspectives Podcast
As the capital markets open further for additional investment, we see potential opportunity for companies looking to expand their footprint both domestically and internationally. Coming off a strong 2025 for the S&P/TSX Composite Index, global investors will likely look for growth and momentum markets to invest in for the year ahead, and Canada checks that box.
Let’s take a closer look at four sectors that may stand to drive another strong year in Canadian markets:
Financials
Banks should see steady profit growth in 2026. Loan demand should pick up slightly as the economy improves, the consumer gains more confidence and a resolution to the trade dispute with the U.S. takes shape. Banks’ interest margins should continue to improve if the BoC only eases a little. Our view is that the labour market will improve modestly in 2026, resulting in improved consumer confidence and spending across the nation. Demand for loans, both personal and commercial, should follow suit—another tailwind for Canadian banks.
Industrials
Industrials should see an improving operating environment. The freight recession that has been ongoing for several quarters looks set to reverse, propelling rails and truckers to a better year. Companies that sell to Canadian and U.S. factories or construction projects should see orders stabilize and sales improve slowly. Input costs should continue to ease, helping sustain a higher margin profile next year. The smaller, more specialized areas of industrials (such as aerospace and defence and engineering/construction) still have very robust outlooks.
Materials
It has been an outstanding 2025 for the materials sector, and 2026 should be a period of consolidation. Gold prices have skyrocketed in response to a weaker U.S. dollar and concerns around global fiscal stimulus. We see the metal appreciating next year, but at a much slower pace. Gold companies are well positioned to capitalize on stronger prices, but after two consecutive years of huge returns, we expect a much smaller gain for the miners in 2026.
Energy
Energy has once again been a challenging sector in 2025. The price of oil has been largely rangebound this year, and we expect the same for at least the first half of 2026. The U.S. administration wants lower prices to help the consumer and the U.S. economy, and OPEC+ continues to bring on additional capacity. Energy is one of the most avoided areas of the market, and there is plenty of pessimism about its outlook. But this provides an interesting setup for investors in 2026—a true contrarian play. Any whiff of supply problems or a pickup in demand owing to better global growth, and suddenly energy could be a big winner. We are on alert for such catalysts.
This generally buoyant view of Canadian equities is not without risks, of course. If trade tensions intensify (again), if global growth slows or if inflation reappears, earnings and therefore stock prices could well fall. A sharper economic slowdown would also hurt banks and cyclical sectors. Those are the downside risks, but there are upside risks as well: faster-than-expected global growth, a strong rebound in commodity prices or a more aggressive pace of easing from the BoC could all boost corporate profits and stock prices.
Overall, however, 2026 seems set up to be a good (though perhaps not great) year for Canadian equities. Coming off a strong 2025 for most cyclical sectors, we see momentum continuing in the first half, in part because the central bank and the federal government will likely continue to support the economy as we await a trade resolution with the U.S. Once there is better visibility on critical trade negotiations, Canadian companies are well positioned, well capitalized and ready for growth in 2026.
About the author
Mike Archibald, CFA, CMT, CAIAVP & Portfolio ManagerAGF Investments Inc.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
Commentary and data sourced from Bloomberg, Reuters and other news sources unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of December 2, 2025. It is not intended to address the needs, circumstances, and objectives of any specific investor. The content of this commentary is not to be used or construed as investment advice, as an offer to buy or sell any securities, and is not intended to suggest taking or refraining from any course of action. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein.
This document may contain forward-looking information that reflects our current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein.
For Canadian investors: Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFI is registered as a portfolio manager across Canadian securities commissions. AGFUS is a registered investment advisor with the U.S. Securities Exchange Commission. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The term AGF Investments may refer to one or more of these subsidiaries or to all of them jointly. This term is used for convenience and does not precisely describe any of the separate companies, each of which manages its own affairs.
AGF Investments entities only provide investment advisory services or offers investment funds in the jurisdiction where such firm, individuals and/or product is registered or authorized to provide such services. Investment advisory services for U.S. persons are provided by AGFUS.
® ™ The “AGF” logo and all associated trademarks are registered trademarks or trademarks of AGF Management Limited and used under license.
RO: 20251112-4971771
Copyright © AGF Investments
