Barlow’s Research Roundup: Best quarter for bank stocks since 2009

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

Banks surge

Scotiabank strategist Hugo Ste-Marie details the best quarter for bank stocks since 2009,

“The sector had an amazing first half, posting a 29-per-cent gain and easily beating the TSX Composite (up 10 per cent). Many still wonder how bank stocks can deliver such strong EPS growth and trade at record-high valuations, despite weak Canadian GDP growth. • While some P/E expansion was expected, no one expected a record-high forward P/E (15.6 times) on the back of very depressed economic activity in Canada (stalled GDP growth and slow housing activity). As shown on the left-hand chart, it seems that foreign buying also played a key role in multiple expansion in the space. While not perfectly correlated, periods of strong foreign inflows tend to coincide with P/E expansion. • Interestingly, we note that Australian banks’ forward P/E ratios have also enjoyed a solid re-rating over the past few years, with the group now trading near 18.0x. The question that comes to mind: Is that a roadmap for Canadian bank stocks?”

Scotiabank’s bank analyst Mike Rizvanovic has “outperform” ratings on National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank.

Micron in focus

Citi analyst Atif Malik cites Micron Technologies as a trade idea,

“We expect DRAM memory prices to continue to see upside (Citi revised 2Q/3Q/4Q26E ASP [average selling price] growth to be up 44 per cent/20 per cent/3 per cent quarter-over-quarter vs prior [estimate] up 37 per cent/13 per cent/11 per cent quarter-over-quarter) on stronger AI CPU demand. As such, we see upside potential to Micron non-contracted 60 per cent of sales. Citi Aug-Q sales/EPS [estimates] are above Street.

Choppy index returns ahead

Morgan Stanley chief investment officer Michael Wilson thinks hyperscalers stocks will outperform semiconductors and that the major U.S. equity indices are unlikely to “trade well” in the upcoming weeks,

“Semiconductor momentum is fading with EPS revisions breadth for the group up against historical highs. Prior underperformance of the Hyperscalers was likely a leading signal for the weaker price action in Semis. The high capex / sales factor is also starting to consolidate, which may encourage more capex discipline in the near-term. We think the Hyperscalers have led in terms of discounting this dynamic and have already gone through their period of underperformance. We also believe this cohort possesses attractive optionality within the AI ecosystem: strong core businesses, the ability to participate in/lead the agentic application layer development and implementation, as well as an underappreciated cost cutting lever. We’ve seen relative performance oscillate between the various types of AI beneficiaries over the past couple of years and we expect those rotations to continue as the cycle evolves. This is simply the next rotation, in our view— Semis to the Hyperscalers and other broadening trades highlighted in today’s report. Given the momentum unwind is happening in some of the larger companies in the index, it’s unlikely the major averages will trade well in the near term—i.e., the rotation continues in a choppy / weaker equity market overall” .

Bluesky post of the day

Diversion

“I didn’t want to write about Rolling Stones’ list of the 50 greatest Canadian artists of all time, but it’s so horrible, that I just have to” - A Journal of Musical Things