Barlow’s Research Roundup: Bank stocks are expensive for a reason

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Expensive but still attractive

Scotiabank strategist Hugo Ste-Marie argued that domestic bank stocks are expensive for a reason,

“Canadian Bank Valuations: Rich, but Still Supported … The TSX Banks Index is now trading near 16x forward earnings—an all-time high dating back to the mid 1990s—and roughly in line with the TSX Composite, versus a historical 15–20-per-cent discount … While some discomfort is warranted at these levels, investors’ sentiment remains broadly constructive. Clients continue to see solid fundamentals and earnings visibility, and importantly, limited alternatives within the Canadian market to redeploy capital. The debate increasingly centers on whether banks may now deserve to trade at a structural premium, rather than their historical discount. Policy is also turning more supportive. OSFI’s recent decision to lower targeted CET1 ratios to 11.5–12.0 per cent should lift ROEs by 100 basis points, further underpinning the investment case. From a flow perspective, while foreign investors remain net sellers of Canadian equities overall, financials have attracted strong inflows over the past year. Historically, flows and valuations are not perfectly aligned, but sustained inflows have tended to coincide with P/E expansion—suggesting the re-rating may not be fully complete. Cross-market comparisons reinforce this view: Australian banks, which have historically traded in line with Canadian peers (because of their similar economy that are both exports oriented and more driven by commodities), have seen material P/E expansion in recent years. Bottom line: Valuations are undeniably rich, but fundamentals, flows, and policy tailwinds remain supportive. We maintain an overweight stance on Canadian banks”.

“Inelastic” demand

Morgan Stanley analyst Eric Woodring uses a big word to describe demand for computing power,

“DELL and HPE earnings illustrate how inelastic compute demand is today despite significant price increases. While we’re not yet “all in” on durability of this trend, Street estimates for ‘26/‘27 look too low. Raising server market TAM [total addressable market] to $800-billion-plus and EPS estimates 5-6 per cent for compute exposed names … Raising our estimates and price targets across our enterprise-server related coverage; overweight-rated SNX [TD Synnex Corp] is our most-preferred way of playing this theme, but also upgrading CDW [Corp.] to OW (from equalweight). While once-in-a-generation memory inflation is creating challenges across Hardware markets, compute is bucking this trend. Spillover refresh from ‘25, enterprise pull-forward, OEM supply scarcity and share gains, and more on-prem inferencing moving into production (with a focus on data security) are driving inelastic enterprise demand, with the Server TAM now expected to grow over 80 per cent year-over-year in ‘26, to $809-billion. To be clear, we are not yell calling for a multi-year ‘Enterprise Server Renaissance’ or inflection point, as our checks do not yet support this. However, enough enterprise server refresh activity is occurring at significantly higher prices that we believe the market is underestimating server revenue growth in 2026 and 2027, leading us to raise our revenue and EPS forecasts by 3-5 per cent, on average, for our 6 enterprise compute exposed names (CDW, DELL, HPE, IBM, INGM, and SNX). Until we gain more comfort on the sustainability of this enterprise server refresh, we prefer not to chase EW-rated DELL and HPE, even as we believe Street numbers are too low for both names”.

“Inelastic” is as close as analyst come to saying demand is bulletproof.

Coal prices rise

The Middle East conflict has led to increased coal demand as BofA Securities analyst Danica Averion reported,

“Thermal coal prices have regained momentum this year with benchmark Australian Newcastle climbing above $150/t in June, the highest in two years. In the context of constrained LNG availability from the Middle East, coal has increasingly been viewed as a relatively reliable and cost‑competitive option for power generation. While the market has softened recently amid easing tensions in the Gulf, we expect global thermal coal prices to remain supported into the summer. Most weather forecasters predict a strong El Niño. This phenomenon is typically associated with hotter and drier conditions across parts of South and Southeast Asia and should underpin incremental coal burn … In the Pacific region, governments have moved quickly to mitigate the impact of Middle East-related energy disruptions, including by easing constraints on coal-fired power generation. South Korea has led incremental coal demand in the region, with imports up by 27% YoY in Jan-Apr. Despite the recent decline in gas prices, Japan, South Korea and Taiwan (JKT) gas-to-coal switching remains supportive, providing sufficient incentive to maintain a bid for coal … [Chinese] domestic prices have regained momentum, with Qinhuangdao 5,500 kcal coal rising by more than 40% YoY to CNY863/t in June. At the same time, resilient thermal generation and tighter seaborne supplies have heightened energy security concerns, prompting authorities to prioritise inventory rebuilding while tolerating firmer prices in the CNY900-1,000/t range”

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