Canadian banks stocks now trade at a premium to U.S. peers and are at the highest levels in 23 years, writes Amber Kanwar.Christopher Katsarov/The Globe and Mail
I’m trying to picture myself pitching an idea for a company while asking, nay demanding, for a minimum $1.5-trillion valuation to “make life multiplanetary, understand the true nature of the universe and extend the light of consciousness to the stars.” I try to imagine the response to my visions of a lunar economy. And then, when pressed about the risk factors, confidently saying, “Well, one of them is that a lot of the tools we need to make this happen haven’t, like, been invented yet, and like, may never be.” I don’t think I’d get that far, but maybe I’m not an effective communicator like Elon Musk.
Here are five things to know this week:
All the banks: Canadian banks are set to report this week with the group trading at a record high. This is quite a feat considering the biggest housing markets in Canada are in a bear market. But the banks aren’t one trick ponies. Capital markets and wealth management should be bright spots with the markets near record highs and the war in Iran creating volatility.
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Exposure to the U.S. will also be a boon, notes Canaccord’s Matthew Lee. Not all banks are set up to take advantage of this. Bank of Montreal, TD Bank and Royal Bank are all positioned well for these tailwinds, says Mr. Lee. At the same time, the war in the Middle East could present problems to banks with international exposure. “In our view, an elongated Middle Eastern conflict will disproportionately impact poorer, fuel-importing countries, driving inflationary pressure and halting investment,” wrote Mr. Lee. Scotiabank’s Chilean operations and National Bank’s Cambodia operations could face credit and loan growth headwinds.
The elephant in the room is valuations. Canadian banks stocks now trade at a premium to U.S. peers, which rarely happens, and are at the highest levels in 23 years. “While part of the premium reflects solid execution, fee income, and better regulatory clarity, we question whether the current operational environment supports further multiple expansion,” wrote Mr. Lee.
Bank of Nova Scotia, BMO and National Bank report Wednesday morning and CIBC, TD and RBC are out Thursday morning.
GDP and me: The Canadian economy is expected to show 1-per-cent expansion in March, compared to last year, and 1.5-per-cent growth for the first quarter. The latter would mark a bounce back of activity after a 0.6-per-cent contraction in the fourth quarter of last year and it is bang in line with the Bank of Canada’s projections. Despite the recovery, it still shows an economy with significant slack and anemic growth.
Adding to the pressure, the recent bond market selloff has effectively delivered the equivalent of two rate hikes over the past two months. “Markets raise rates for an economy that did not need it,” wrote Citi economist Veronica Clark. Especially when inflation came in less than expected last week. “We continue to think that not only are rate hikes overpriced, but that BoC officials will still cut rates to 1.75 per cent later this year.”
Creamed: Salesforce is the last of the software giants to report quarterly results and investors are holding their breath to see if AI can spur growth. Analysts are relatively optimistic, expecting 12.4-per-cent topline growth, which would be the best since Q4 2023. Yet the stock has sold off with software peers on fears that companies will replace Salesforce offerings with AI tools from Anthropic or OpenAI.
Key in the quarter will be its ability to move from piloting Agentforce, its AI-enabled customer relationship management, to paid use by customers. While the stock is fighting a tide of investment that is flowing out of software and into other areas such as semiconductors, some of the wounds are self-inflicted. Agentforce hasn’t shot the lights out and adoption is slow.
“Agentforce continues to be a driver of customer conversations, but we haven’t picked up meaningful signs of customers scaling it,” wrote Citi’s Tyler Radke in a preview note. Salesforce reports Wednesday after the close.
Big box: Costco got taken down with Walmart results last week. Walmart stock fell nearly 9 per cent after warning higher fuel costs could hurt the bottom line and lower-end consumers could be pulling back. Even though results were better than expected, that’s not good enough when you trade at 41x earnings.
Costco, meanwhile, trades at 50x earnings. Because Costco reports sales results monthly, we know those held up well. The question will be about whether they can keep growing at that pace and whether higher inflation drove up costs and squeezed margins. Basically, can Costco prove it is worthy of trading at 50x earnings?
“Admittedly, COST is not ‘cheap,’ trading at a premium versus the historical averages,” wrote Raymond James analyst Bobby Griffin. “Nonetheless, we believe the premium is warranted given Costco’s consistent execution, defensive category mix, and strong member loyalty.” Costco reports Thursday after the close.
AI economy: Dell’s AI server revenue is expected to explode 46 per cent from the last quarter when it releases results Thursday after the bell. At this point no one is doubting that the PC-maker has found a new lease on life as a beneficiary of the trillion-dollar AI data centre buildout. The stock is up 134 per cent in 2026 alone.
The rub is the valuation, warns Morgan Stanley analyst Erik Woodring, who is the only sell on the stock. While that’s another way of saying he has been wrong on it, it’s worth taking a peek at what contrarians have to say about parabolic moves. “DELL now trades at an all-time 30 per cent premium to AI infra peers, and (second-half of the year) uncertainty remains with memory inflation/supply,” wrote Mr. Woodring in a preview note.
Memory chip prices are up 600 per cent, which can lead to stockpiling if companies are afraid prices will go even higher. Mr. Woodring thinks this has pulled forward demand and the second half of the year could be vulnerable. He acknowledges this quarter will be a “blowout” with strong results, but long-term investors should be cautious.
In the Money with Amber Kanwar is Canada’s top investing podcast. New episodes out Tuesday and Thursday. Subscribe at www.inthemoneypod.com