Canadian stock market expected to grow in 2026, but at a more muted pace

Investors are expecting the S&P/TSX composite index to deliver more muted returns of five per cent to nearly 10 per cent in 2026 after two consecutive years of double-digit gains.

With one more trading day left in the year, the index was on the verge of delivering a 30 per cent return in 2025, its best yearly return since 2009.

Brent Joyce, chief investment strategist at BMO Private Wealth, said BMO predicts the S&P/TSX composite to end 2026 at 34,000, from about 31,960 on Tuesday, and is recommending investors be overweight on equities to take advantage of government spending, as well as defence spending, tax cuts in the United States and China opening its coffers.

But he said investors will need to stay focused on earnings.

“Earnings are what matters because nothing is cheap,” Joyce said, adding that the current macroeconomic landscape is configured to support businesses.

For example, the Bank of Canada has cut interest rates to 2.25 per cent, a level he called “quite accommodative,” though it sits at the bottom of the central bank’s neutral range of 2.25 per cent to 3.25 per cent.

Meanwhile, billions of dollars in stimulus spending are coming from the federal government to get infrastructure projects off the ground and companies investing again.

“That’s a good backdrop for earnings to deliver,” he said.

Neil Linsdell, vice-president and head of investment strategy at Raymond James Investment Counsel Ltd., also expects the S&P/TSX composite to end 2026 at 34,000.

He said in a report that the breadth of stocks trading above their 50-day moving average has increased and “we expect this momentum to carry into 2026.”

His forecast for the S&P/TSX composite is based on three assumptions: the Bank of Canada will cut interest rates one more time, possibly early in the new year, to take rates to two per cent and be in stimulative territory; the successful renewal of the Canada-United States-Mexico Agreement (CUSMA); and the “rollout” of federal spending by Ottawa.

“We expect Canadian equities to benefit ahead of the broader economy, given the investment-heavy nature of budget 2025,” Linsdell said.

But some investors said those gains might be harder to nail down since bank and gold stocks 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,” Craig Basinger, chief market strategist at Purpose Investments Inc., said. “And then financials would have to perform.”

Purpose hasn’t made a call on where the S&P/TSX composite will land in 2026, but Basinger said the year ahead appears challenging.