A year-and-a-half into U.S. President Donald Trump’s trade war, money managers are grappling with a perplexing question: Why chase returns from gold, NVIDIA Corp. or Space Exploration Technologies Corp. (SpaceX) when they can buy Canadian bank stocks instead?
Shares of the Big Six Canadian lenders are up an average of 67 per cent over the past year, or 74 per cent once dividends are factored in. Gold, once seen as the surefire safe haven amid global chaos, is up 24 per cent over the same period, while shares of NVIDIA, the chip maker powering the artificial intelligence boom, are up 45 per cent.
To the uninitiated, this performance can be baffling. Canada’s unemployment rate is still higher than it was prepandemic; the country’s residential housing market, which propped up economic growth for more than a decade, is in a multiyear slump; and bank loan growth has been anemic lately.
Yet through it all the country’s largest lenders have shown their resilience. Over the past 12 months they’ve collectively reported $71-billion in net income, up 14 per cent from the year prior, and a number of them have posted returns on equity, one of the industry’s most important measures of profitability, that are world class.
The banks have hot, and volatile, markets to thank. Their wealth management arms make more when markets rise, their trading desks execute more orders when investors respond to ever-changing U.S. policies and their investment banking divisions generate more fees when companies go public or make acquisitions, and they have been.
Yet bank shares are so hot lately, up an average of 29 per cent since the start of the year alone, that Canada’s largest lenders, of all things, are starting to look like meme stocks. Can their stellar run last, or is investor misery inevitable?
Gabriel Dechaine, an analyst at National Bank Financial, said this very conundrum is a pressing question, if not the dominant one, when he meets with institutional investors. What makes answering it so challenging is that Canada’s banks have handled everything that’s been thrown at them so far.
“As much as people say the banks shouldn’t trade where they are, critics have a hard time explaining what could derail them,” he said in an interview.
Despite the trade war, Canada’s economy expanded by 1.7 per cent in 2025, and this year it’s still on track to eke out 1.1 per cent growth, according to the Bank of Canada. Historically, bank profits have expanded at a multiple to the country’s GDP.
The banks are also getting some regulatory relief to deploy more of their cash reserves toward new loans, which should boost growth. On Friday, Canada’s banking regulator lowered the size of the capital cushion that banks must hold to protect against economic downturns. The hope is the capital will be deployed to boost spending on defence, infrastructure and artificial intelligence.
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As for existing loans, defaults are rising, but total losses have been rather muted despite elevated unemployment and acute pain in the auto, steel and aluminum industries.
Looking forward, economic uncertainty is brewing again because the United States-Mexico-Canada Agreement’s review deadline of July 1 is rapidly approaching and the three countries are only starting to get serious about negotiations. Yet even Pete Hoekstra, the U.S. ambassador to Canada, who has been quite negative in the past, has sounded a lot more optimistic lately.
Because so much has gone right, a market rally makes some sense. The issue, though, is that it’s gone to the extreme.
Historically, Canada’s largest banks have traded around 11 times their earnings a share. Today that average is around 15 times expected earnings in 2027 – a level rarely ever seen. More often than not, companies snap back to their historical anchors.
As for current profit drivers, relying on capital markets in particular to keep powering earnings is fraught. Trading revenues and advisory fees are historically volatile, which is why debt rating agencies and Canada’s banking regulator have discouraged the banks from over-relying on these divisions for growth.
Investors, though, are acting as if soaring profits from capital markets are the new norm.
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They also aren’t differentiating between the banks all that much when buying their shares. Although there is a 12 percentage point gap between Toronto-Dominion Bank, the top performer over the past year, with an 80 per cent total return, and National Bank, the ‘worst’ performer with a 68 per cent total return, most companies would kill for this last place performance. The rising tide has lifted all boats, and if anything, those with the most durable profits over the past five years are lagging their peers lately.
The biggest threat to the current rally, though, may not be the banks themselves. Stock markets are increasingly driven by momentum – investors who pile into hot sectors and then flee when they think the trade has run its course.
Two years ago, shares of Canadian engineering firms Stantec and WSP Global were soaring. They’re now down about 35 per cent each since AI fears hit their sector in November, even though they keep reporting organic revenue growth.
Asked about these concerns, Barry Schwartz, chief investment officer at Baskin Wealth Management in Toronto, acknowledged they’re all valid. But he takes a higher-level approach. “Financials tend to do well when the markets are at all-time highs,” he said in an interview. And while the price-to-earnings ratio is stretched, “it’s not like the banks are trading at SpaceX valuations.”
“I don’t think you’re an idiot to buy Canadian banks here at these levels,” he said. U.S. stalwarts like Goldman Sachs and Morgan Stanley are trading in the same range. “But your expectations should be tempered.”