Canadian investors are bracing for a shift in market momentum as experts forecast a more moderate climb for the country's primary stock index in 2026. After two consecutive years of robust double-digit gains, the S&P/TSX Composite Index is projected to deliver returns in the range of five to nearly ten percent in the coming year.
A Stellar 2025 Sets a High Bar
This anticipated slowdown follows an exceptionally strong performance in 2025. With just one trading day remaining in the year, the index was on track to post a remarkable return of approximately 30 percent. This would mark its best annual performance since the post-financial crisis rebound in 2009, setting a challenging benchmark for the year ahead.
Strategists Outline the Path to Growth
Despite the expected deceleration, several prominent investment firms see a clear path for continued growth. Brent Joyce, Chief Investment Strategist at BMO Private Wealth, stated his firm predicts the S&P/TSX Composite will close 2026 at the 34,000 level, rising from about 31,960 in late December 2025. Joyce recommends investors maintain an overweight position in equities, citing supportive factors including government stimulus spending, elevated defence budgets, U.S. tax cuts, and fiscal measures from China.
However, he emphasizes that investor focus must remain squarely on corporate earnings. "Earnings are what matters because nothing is cheap," Joyce noted, adding that the current macroeconomic environment is configured to support business performance. He pointed to the Bank of Canada's key interest rate, which had been lowered to 2.25 percent—a level he described as "quite accommodative"—as a tailwind.
Earnings and Economic Tailwinds
This view is echoed by Neil Linsdell, Vice-President and Head of Investment Strategy at Raymond James Investment Counsel Ltd., who also forecasts a year-end 2026 target of 34,000 for the TSX. Linsdell's outlook rests on three key assumptions: a further interest rate cut by the Bank of Canada to a stimulative two percent, the successful renewal of the Canada-United States-Mexico Agreement (CUSMA), and the rollout of federal infrastructure spending outlined in the 2025 budget.
"We expect Canadian equities to benefit ahead of the broader economy, given the investment-heavy nature of budget 2025," Linsdell said in a report. He also noted that the breadth of stocks trading above their 50-day moving average has improved, suggesting positive momentum could carry into the new year.
Valuation Concerns and Sector Concentration
Not all analysts share the same degree of optimism, with some highlighting heightened risks. Craig Basinger, Chief Market Strategist at Purpose Investments Inc., cautioned that securing gains in 2026 might be more difficult, particularly given that bank and gold stocks—key TSX components—are trading at higher premiums.
"To be really bullish on the TSX in the next year, you have to believe, one, either gold is going to continue to run, which I think is a challenge," Basinger said. "And then financials would have to perform." While Purpose Investments has not issued a formal year-end target, Basinger suggested the coming year appears challenging, with the TSX facing a higher risk of a pullback compared to other markets.
He pointed out that the S&P/TSX Composite is now trading at about 16.5 times forward earnings, a valuation he considers "pretty stretched." Furthermore, the market's impressive 2025 gains were highly concentrated. Basinger estimated that roughly two-thirds of the index's advance came from just two sectors: materials and financials, with gold alone accounting for approximately 11 percent of the gains within the materials sector.
In summary, while the breakneck pace of 2025 is unlikely to repeat, the consensus among market strategists points toward continued, albeit more measured, growth for Canadian equities in 2026. The trajectory will heavily depend on the delivery of corporate earnings, the direction of interest rates, and the performance of the market's most influential sectors.
