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Scotia Capital sees potential for a “strong 2026” for Canadian stocks heading into earnings season, pointing to accelerating profit growth as a key factor, though analysts note that elevated expectations also raise the risk of disappointment.
A preview note from Hugo Ste-Marie and other analysts reiterates Scotia Capital’s “overweight” positioning on Canadian equities. Upcoming fourth-quarter results are expected to show Toronto Stock Exchange (TSX) earnings per share (EPS) hitting a record $452, up substantially from the previous high of $417, driven by big gains in precious metals and banking results that consistently beat expectations.
“Overall, EPS leadership and precious metal strength should rekindle domestic and foreign investors’ appetite for the Canadian equity market, which could help narrow the valuation discount relative to the U.S. and further position the TSX for another year of outperformance,” the note said.
The analysts see “decent odds” the TSX could surprise forecasts to the upside in 2026. They argue that if economic growth in Canada and the U.S. beats expectations, it would provide a tailwind for revenue. While current consensus calls for roughly 16 per cent profit growth in 2026, Scotia points to indicators that historically correlate with growth topping 20 per cent.
It points out that forecasts are already being revised upwards across much of the market, and that additional upside could come from several directions. Industrials and consumer-facing companies could benefit in a scenario of “lower tariff” pressure or a successful CUSMA renegotiation, while energy earnings could rebound if global growth improves or supply risks re-emerge. Even banks, the analysts add, could deliver further surprises if credit losses continue to fall and housing markets stabilize, potentially lifting their already expected 10 per cent earnings growth.
Still, Scotia cautions that strong expectations raise the bar for the upcoming earnings season. The note says analysts’ estimates are generally close together, meaning even modest misses could be punished, particularly in sectors where valuations already assume strong results.
“Perhaps the biggest risk for TSX Composite performance comes from everyone expecting a solid ‘beat and raise’ quarter,” the note said.
Banks, discretionary stocks and energy are seen as most vulnerable to disappointment if results merely fall in line or guidance fails to improve.
Looking specifically at the upcoming fourth-quarter reporting season, Scotia sees materials as a standout. Analysts expect the group to grow earnings by a “staggering” 112 per cent year-over-year, fuelled by strong gold, silver, and copper prices. In contrast, the Consumer Discretionary landscape is mixed. While the auto sector struggles, retailers like Aritzia (ATZ.TO) and Groupe Dynamite (GRGD.TO) are positioned to beat expectations. Energy is expected to report weaker fourth-quarter results, with oil prices having averaged below consensus, though higher production could “cushion some of the revenue weakness.”
Banks are forecast to deliver modest fourth-quarter earnings growth, but face little room for error after a strong rally. With valuations elevated, analysts say the sector will need a “perfect one-two punch” of lower credit losses and stronger profit to sustain current levels, warning that “anything less than perfect execution will likely weigh on valuations.”
Defensive sectors such as telecommunications, utilities and real estate are expected to show weaker fourth-quarter performance, with Scotia pointing to negative earnings revisions and limited near-term catalysts.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
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