Canadian bank stocks are beating the market this year. For the year to date, the TSX banking index has risen 24.6%, vs 21% for the broader TSX. Some individual bank stocks have been among the year’s top-performing Canadian equities. Toronto-Dominion Bank (TSX:TD), for example, is up 44% year to date, with a 49% total return including dividends.
The question is, why? Banks aren’t normally thought of as the hottest stocks on earth. To the contrary, they’re usually considered a little boring. So, it’s a bit surprising that they are really rocking this year. Not only in Canada but also in the U.S. and elsewhere, banks have been some of the top-performing equities of 2025. In this article, I explore why Canadian bank stocks are beating the market this year and share my prediction for where things are headed in 2026.
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Why banks are beating the market
There are several reasons why Canadian bank stocks are beating the market this year:
- The banks are putting out pretty good earnings.
- The bank stocks had, in many cases, been beaten down at the start of the year.
- Other sectors have gotten very pricey.
First, the earnings. Many Canadian banks have put out very strong earnings for 2025 to date. Take Royal Bank of Canada (TSX:RY) for example. In the trailing 12-month period, its revenue grew 16.26%, its earnings grew 19%, and its return on equity (ROE) increased by 9.3%. For a bank of RBC’s size, those results were pretty great.
Another explanation is the fact that some banks entered the year being cheap and beaten down. This one doesn’t apply so much to Royal Bank of Canada, which has been making consistent gains for several years now. But it describes TD Bank to a “T.” At the beginning of this year, TD Bank had just been fined $3 billion and had its U.S. retail assets capped at $430 billion due to a U.S. money laundering settlement. Things were looking bad, and the bank’s executives told investors that earnings for the year would take a hit. Later, though, the company put out some surprisingly good earnings releases, launched a massive buyback program, and made progress in improving its anti-money laundering practices. The stock predictably shot up in response.
Third and finally, Canadian bank stocks have outperformed because many other sectors have gotten too pricey. Take technology, for example. Tech stocks typically have price-to-earnings (P/E) ratios well above 30. Many utilities are quite pricey relative to their growth rates, trading at around 20 times earnings while not growing much at all. Compared to this, Canadian bank stocks, with P/E ratios around 13, which is about what TSX banks traded at on average at the start of the year, looked comparatively attractive.
Where things are headed
As we’ve seen, Canadian bank stocks outperformed this year due to a combination of strong earnings performances and having been cheap at the beginning of the year. In all likelihood, the banks still have some room to run from here. They are all very well capitalized while having many creditworthy borrowers to lend money to. I don’t know exactly how high they will go, but I think they will go higher.
