1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 127
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
While Materials was the primary performance driver in 2025 as illustrated above, structural trends
that supported last year’s strength are expected to remain influential in 2026. Companies exposed
to long-term growth drivers – artificial intelligence, electrification and power infrastructure,
defense and geopolitical realignment, onshoring, and industrial reconfiguration – are anticipated
to continue delivering strong results.
Furthermore, with more than 60% of Canadian-listed company revenues generated outside
Canada, we expect strong gains supported by lower interest rates in key markets, fading policy
headwinds, and a potential AI-driven productivity supercycle in the U.S. – still the country’s largest
trading partner and the world’s growth engine.
On the earnings front, real estate shows the highest forecasted EPS growth for 2026 at 54%,
followed by materials at 46% and utilities at 19%. We note that elevated earnings growth does
not necessarily correlate to sector outperformance, as evidenced by REITs hovering near a 0%
price return in 2025. Structural factors such as subdued population growth and oversupply in
certain regional markets may remain key headwinds for real estate into Q1/2026 and beyond.
In Financials, despite high single digit EPS growth expectations, the backdrop remains favourable.
Household composition helps temper mortgage renewal risk – roughly 32% of Canadian
households rent, 33% own outright, and 35% carry a mortgage with an average balance of about
$245,000. First-time buyers from the past four years represent only ~6% of households, limiting
exposure to higher renewal pressure. Broadly speaking, consumer dynamics are not solely tied to
mortgage renewals; discretionary spending and wealth accumulation trends continue to play a
role. Combined with double-digit growth in wealth and capital markets activity, these factors point
to a supportive environment for continued absolute gains, even if year-over-year growth
moderates.
Canadian Industrials, which derive more than half of their sector weight from the two major rails –
CNR and CP – experienced notable underperformance in 2025, alongside other transportation
names as the freight recession marked a third consecutive year. While recovery timing remains
uncertain, signs point to a near-term bottom. Increased share buybacks and reduced capex amid
softer demand should help support free cash flow and EPS growth. Themes influencing certain
pockets of industrial performance include AI integration fueling equipment and energy demand,
infrastructure commitments supporting construction, and defense growth amid global tensions.
These forces underscore a shift toward technology adoption, capital efficiency, and heightened
geopolitical risk.
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