Barlow’s Research Roundup: U.S. earnings bring good news for Canadian bank stocks

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

Good news for banks

Scotiabank analyst Mike Rizvanovic finds positive signs for Canadian bank stocks in U.S. earnings,

“We see Q2-26 earnings results for the U.S. banks (the money center banks and large regional banks) as a positive read-through overall for the large Canadian banks as an early indicator for Q3-F26. Among the key earnings drivers, Capital Markets was the most notable in terms of the magnitude of the positive variance vs. consensus expectations. Net interest income was also constructive, increasing sequentially on a roughly flat margin and decent loan volumes (particularly within commercial), while credit improved during the quarter with both Provisions for Credit Losses and non-accrual loans falling, and management commentary positive on the outlook. Among the Canadian banks within our coverage universe, we see the U.S. banks’ results within lending and credit as most positive for BMO and TD given their group-high exposure to U.S. P&C Banking, while the Capital Markets strength should be seen as a positive read-through for the group overall, highlighting robust client activity in the current volatile macroeconomic environment. We believe the U.S. banks’ results should give investors a bit more confidence in the near-term earnings outlook for the large Canadian banks, particularly in light of current elevated valuation multiples.”

Mr. Rizvanovic has “sector outperform” ratings on BMO, National Bank, Royal Bank and TD Bank.

Most promising sectors

RBC Capital Markets strategist Lori Calvasini released her monthly Canadian Equity Chart Book and here are some relevant excerpts,

“Our Canadian analysts have a constructive view on performance, valuations, and the domestic policy backdrop, and to a lesser degree, demand. Our Canadian analysts tilted negative on the knock-on, ongoing, lingering and ripple effects of the Iran war. ...

Performance outlooks: Views tilted positive for most sectors, with the most constructive views for Real Estate, Health Care and Consumer Staples. Views leaned neutral for Communication Services and Tech.

Valuation views: Valuation assessments are positive or neutral for most Canadian sectors and tilt most constructive for Consumer Discretionary and Consumer Staples. The only exceptions were Utilities and industrials, which tilted slightly negative.

Demand views: Views are mostly positive across sectors, with the most constructive tilts in place for Utilities and Industrials and negative assessments for Communication Services, Financials and Materials. REITs also came in neutral on this question …

The Canadian banks under our coverage are trading at elevated valuations, possibly peak levels depending on the frame of reference … Assuming all the large Canadian banks we cover achieve their medium-term target core Return on Equity’s (ROE), current risk premiums imply an average stock price upside of ~10%. Assuming a 100-bps improvement to our 1-year forward core ROE estimate for each bank, current risk premiums imply an average stock price upside of ~7% …

[REITs} We see a decent setup for the year ahead; outside support could make it even better. Our constructive view is underpinned by: 1) healthy organic growth outlook across majority of property types; 2) decent N12M earnings and NAV growth (mid-to high-single digit %); 3) reasonable valuations; and 4) strong liquidity. Compression at long-end of the yield curve would likely also help.

Decent outlook for earnings growth. We forecast annual FFOPU growth of +2- 6% in 2026E-2027E. For 2026, we expect growth leadership from seniors housing, self-storage, and industrial. Multi-family and retail should deliver moderate growth, while office should continue to lag”

Rally killer

In a separate Scotiabank report, strategist Simon Fitzgerald-Carrier outlines one factor - rising bond yields - that has acted as a rally killer historically,

“On Tuesday, Defense Secretary Pete Hegseth told the Senate Appropriations Committee that the cost of the war in Iran has reached US$37.5 billion, US$9 billion higher than the Pentagon’s previous estimate. With the conflict continuing to escalate, particularly amid reports that the Houthis are disrupting tanker traffic in the Red Sea, military expenditures could place additional pressure on the U.S. fiscal outlook… the Congressional Budget Office (CBO) estimated in February 2026 that the U.S. federal deficit would rise to 9.1% of GDP by 2056, with roughly 75% of the deficit attributable to net interest expenses, reflecting the growing burden of federal debt. While the current conflict is only one factor, additional military spending reinforces concerns about the long-term fiscal trajectory.

In our view, these fiscal concerns help explain why U.S. 10-year yields have been reluctant to decline meaningfully, even when WTI crude briefly fell below US$70/bbl earlier this month before rebounding. With uncertainty surrounding the Middle East conflict persisting and U.S. 10-year yields having retraced to their May highs, we maintain our under weight recommendation on bonds. YTD, both U.S. and Canadian bonds are still underperforming cash”

Bluesky post of the day

https://bsky.app/profile/atrupar.com/post/3mrbol7qpun2k

Diversion

“Volcanoes Started Earth’s ‘Great Dying.’ This Unexpected Plant Made It Worse” - Gizmodo