Canadian bank stocks, the so-called Big Six, have long been treated as stable, dividend-paying, and decidedly “boring” stocks to own. We think they remain appealing in the current state of the global stock market.
Since the Big Six account for roughly 24% of the S&P/TSX 60, they not only benefit from global fund flows into defensive Financial sector stocks, but also get buoyed by passive flows into the Canadian index that look for exposure to global commodity and weaker U.S. dollar themes.
Over the past twelve months, the TSX Canadian Banks Composite Index (STBANKX) has outperformed the Nasdaq Composite by about +20%, even before adding roughly 4.5% in dividends.
That performance is not accidental. It reflects rising demand for non-speculative, non-U.S.-dollar equities with steady profitability and dependable yields.
We see some concerns about the Canadian banks’ valuations resurfacing after last year’s strong run, but we see limited reason for alarm at this stage of the cycle, when investors increasingly want a mix of low volatility, stable profitability, and income.
On that basis, valuations do not look stretched once profitability, low leverage, and high dividend growth are properly accounted for. We recommend investors not to use nominal price and valuation charts as a guide, but rather focus on the fundamental drivers of risk in comparison to the U.S. or European bank stocks, and relative to overbought themes such as U.S. Tech.
The Canadian bank index tends to act as a low-volatility complement to equity portfolios, particularly when the stock market faces downside risks triggered by some correction in Tech euphoria or Trump-related policy shocks.
We have been vocal about the meme-like behavior in U.S. Technology stocks, where retail liquidity rushed to chase leveraged gains after the April sell-off.
During the Nasdaq-led rally, fueled by TACO trades and the Fed’s easing bias, Canadian banks were left meaningfully behind. Since October, however, they have climbed steadily as markets began to question the sustainability of AI-driven debt deals and increasingly euphoric valuations.
Flows and Relative Value Versus U.S. and Europe
Canadian banks also benefited from global asset flows seeking stable, non-U.S.-dollar alternatives that offer value and exposure to basic resources. As tariff clouds began to clear towards the end of the summer and oil’s downward trend stabilized around October, Canada’s equity market became a more attractive option for global portfolios. The Canadian index is often treated as a stock market proxy for global commodities and oil, and the stabilization in energy helped restore confidence in the broader complex.
These flows also mattered domestically. Passive inflows into Canadian assets supported the loonie and the bank stocks, which delivered better-than-expected profit growth of +16% in 2025. The upward trend in profits is expected to continue in 2026, absent any economic shock triggered by an unpredictable southern neighbor.
Passive index flows into relatively safe non-U.S.-dollar equities were a contributing force in last year’s return outcome as well. This dynamic was also visible in the relative performance of European banks. Despite a wave of financial deregulation and easing of reserve requirements aimed at improving profitability and dividend capacity for U.S. banks, European bank stocks were lifted by their perceived relative safety. Policy uncertainty weighed more heavily on Canada than on the EU and Switzerland during that part of the year. In U.S. dollar terms, the total return of European banks, represented by the highly liquid Stoxx Europe 600 Banks index (SX7P), reached 100%, with liquid Eurex SX7P futures adding to the region’s attractiveness for global flows throughout the past year.
If there is any valuation concern arising from passive global flows seeking refuge from a weakening U.S. dollar and chaotic U.S. policy, it arguably lies more with Europe than with Canada. The P/E multiple expansion of the Stoxx 600 Europe Banks Index reached +50% in 2025, compared with a +20% multiple expansion for the Canadian banks index last year.
The valuation premium of the Canadian Big Six is easier to defend when viewed through the lens of profitability. Their returns on equity are achieved with lower and more stable leverage. The median return on equity (ROE) of the Canadian Big Six is consistently higher than that of the S&P 500 banks index, whose ROE often sits below even the minimum of the Canadian cohort. In other words, the market is paying for quality and stability, rather than speculative optionality.
2026 Setup: Macro Tailwinds, Funding Relief, and Portfolio Role
The start to the new year also sharpens the macro backdrop. The early signals of Trump 2.0 point to actions that could further damage the U.S. dollar’s safe-haven and reserve-currency status, which has long underpinned the rules-based order in global trade and politics. That order, while often more rhetoric than reality, now looks increasingly abandoned as the world awaits what is framed as the next steps in U.S. expansionism.
In that environment, international asset managers may increasingly seek diversification away from U.S. assets as the global order is likely to become more fragmented. Elevated trade tensions and nationalist industrial policy can also create a strategic asset premium for Mining, Metals, and Energy exposures. That is a favorable setup for Canadian assets, provided U.S. hostility does not pivot directly onto the Canadian economy. If we set that risk aside in the near-to-mid term, Canadian banks look well-positioned for investors seeking low-volatility exposure, stable dividend growth, and highly profitable franchises.
Consensus analyst estimates imply that Canadian banks can deliver mid-single- to low-double-digit earnings growth in 2026. This looks achievable, barring negative economic or political surprises. Profit generation and steady capital returns, including dividend increases, could support higher returns on equity.
Net interest income may also expand, aided by stable interest margins that help offset the slow loan growth expected in the first half of the year. Analyst forecasts point to a median +5% increase in net interest income, with lower Bank of Canada rates helping to reduce funding costs.
Funding conditions have already improved. Long-term swap spreads were around 255 basis points, roughly +220 basis points above historic lows, but -194 basis points below the October 2023 peak. CORRA, a proxy for the cost of bank funding, is at around 230 basis points, -270 basis points below its January 2024 peak. This is seen as mainly supportive of net-interest margins of the Big Six in 2026.
Another point of relative stability is the lower volatility of Canada’s long-term rate environment. By contrast, the U.S. yield curve appears more vulnerable to steepening risk if policy uncertainty keeps rising amid geopolitical shifts. In Europe, fiscal dominance risks look more material ahead, particularly for France and the U.K.
Taken together, Canadian bank exposure remains a sensible way to pivot towards a lower-volatility equity portfolio, especially for the first half of the year. It can help weather a storm triggered by a correction in overvalued Tech or another geopolitical surprise out of Washington.
Mehmet Beceren is vice president and senior market strategist at Rosenberg Research.