Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Reduced expectations for banks
RBC Capital Markets analyst Darko Mihelic has reduced his price targets and profit expectations for domestic banks,
“We reduce our target forward P/E multiples based on our 2026 core EPS estimates by 1.0x for all of our covered large Canadian banks and lower our price targets for the group. Our PTs decrease to $205 for BMO (was $219), $98 for BNS (was $106), $147 for CM (was $158), $180 for NA (was $193), and $138 for TD (was $148). Our median forward target P/E multiple moves lower to 14.0x (was 15.0x) and the large Canadian banks we cover are currently trading at a median of 12.9x our 2026 core EPS estimates. Peak valuations in past periods were not sustainable and were followed by declines. Valuations are at elevated levels and have been rising since 2023, a review of prior period valuation levels against fundamental return metrics suggests a median 14.0x multiple is “defensible / reasonable”. The Canadian bank index is trading at a forward P/E of 13.0x, above the historical average of 10.8x and near the 2006 peak of 14.0x. The Canadian bank index is trading at 1.99x P/B, above the historical average of 1.79x. Our median forward P/E target multiple is 14.0x for the large Canadian banks we cover, as we expect improvements in core ROE and core EPS growth in 2026 and 2027. Core EPS growth is a significant factor in our valuation – our PTs imply a median P/E of 12.7x our 2027 core EPS estimates. We note our estimates include several assumptions with downside risks including: 1) a favourable CUSMA/USMCA outcome, 2) stabilizing geopolitical risks (we assume higher oil prices are not prolonged), 3) no shifts to a higher interest rate environment (possibly impacting loan growth), 4) benign credit quality, and 5) no impacts on capital markets or wealth businesses from potential broader economic weakness”
Mr. Mihelic has outperform rating on CIBC and TD Bank.
Read more in today’s analyst upgrades and downgrades report.
Brookfield attractive after selloff
Scotiabank analyst Mario Saric sees a profitable entry point for Brookfield Asset Management,
“Software, AI & Private Credit concerns have driven U.S. Alt [alternative asset manager]shares down an avg. 27% YTD on questions over credit quality, valuations, and fundraising momentum … BAM seems to have the lowest Software & Credit exposure amongst peers, at ~1% and ~30% (of total AUM), something investors have recognized. BAM’s 18% YTD sell-off feels overdone (esp. with our AI view) and = a strong entry point although its 12% avg. peer outperformance may have some seeking torque elsewhere. Not all credit is created equal. We think BAM has limited exposure to bigger areas of concern. We est. direct lending = ~2% of Total AUM, below most peers.
Most of BAM credit = Liquid/Real Asset/Investment Grade. Our BAM Target Price & Forward NAVPS fall 13% (-$8) on a 3x Target FRE multiple drop to 23x, which reflects a US10YR of ~4.50% (Exhibit 7), while BAM trading FRE multiple is ~1/3rd lower than 32x peak in 2025 (Exhibit 8). BN TP falls ~7% on the BAM move. We see attractive value + growth in both BAM and BN.”
The rates are too high
TD Securities head of global rates, foreign exchange and commodities strategy Andrew Kelvin thinks domestic short-term bond yields are out of line,
“At risk of stating the obvious, there has been substantial volatility in the front-end of global yield curves, and Canada is no exception. We’d put forward that the sell-off in CAD front-end rates is primarily due to global factors and does not reflect the domestic economic context - namely, the sharp deceleration in core inflation measures is not getting enough attention. As a value proposition, the CAD front-end is still good. The Bank of Canada was at pains to emphasize the weaker points of the economic outlook at its most recent policy rate announcement. We gladly concede that there are economic paths that could result in the BoC lifting rates in the latter part of the year, but we’d emphasize that the near-term risks probably skew towards easing. Current market pricing is not consistent with a two-sided distribution of outcomes. Central bank communications do have short half lives, but it would be reckless to entirely discount the Governor’s recent comments. Even with a material rally to start the week, the CAD front-end still looks cheap to us - on both an outright basis, and tactically versus the US.”
This view is shared by economist David Rosenberg who just added two-year Canadian bonds to his model portfolio.
Bluesky post of the day
https://bsky.app/profile/conorsen.bsky.social/post/3mhsrvb2qzq24
Diversion
“Six Strength Training ‘Rules’ You Can Safely Ignore” - Life Hacker