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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.
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 8% 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.
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:
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 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.
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 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.
Mike Archibald, CFA®, CMT, CAIA, is Vice President and Portfolio Manager at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
Notes and Disclaimer
© 2025 by AGF Ltd. This article first appeared in AGF Perspectives. Reprinted with permission.
Commentary and data sourced Bloomberg, Reuters and company reports unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of December 2, 2025, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. 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 investment decisions arising from the use or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
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.
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 America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
®The “AGF” logo is a registered trademark of AGF Management Limited and used under licence.
Image: iStock.com/Andrzej Rostek
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