What an amazing year it has been for the TSX Index, which is up more than 21% year to date. And the best part is, there’s still two months left to go, and if you’re a believer in the big comeback in gold prices after a rough past month, as well as continued strength in the big banks on the back of the latest interest rate cut from the Bank of Canada, I think there’s a good chance that a Santa Claus rally could be very kind to the Canadian stock market this year.
Indeed, the TSX Index rally may have pulled the brakes in recent weeks, but I think the next leg will be higher, especially when you consider that valuations, on average, are still much lower than the S&P 500 and certainly the tech- and growth-weighted Nasdaq 100 Index.
In any case, I believe that the TSX Index is more than just a cheaper alternative to the S&P 500. With a wealth of commodities and energy exposure, you’ll also be able to experience less volatility should the tech trade begin to show subtle signs of cracks. It has been a losing game to be sidelined from tech stocks with the belief that AI is due to fall.
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More volatility in tech should be expected in 2026. In my view, dividend plays seem like the perfect place to hide
Bear markets are normal, and once the Bank of Canada potentially shifts gears from rate cuts to a rate pause and then, eventually, a few rate hikes, there might be a few disturbances that investors will need to deal with. Indeed, if you can’t handle a 20% decline at some point over the next five years or so, you may wish to take a step back and re-evaluate your exposure. For younger investors, such a decline, I think, would be a magnificent gift, allowing investors to get more shares for less as the AI revolution experiences a cooling off.
AI winters in stocks can and probably will happen, and the chances, I think, increase as investors punish firms that are spending too much on the efforts with too little to show. And those big AI promises may not be enough to justify higher multiples on various stocks. Either way, I think there are a lot of storm clouds that investors need to consider when it comes to the highest-multiple growth stocks out there, especially those that don’t even have a price-to-earnings (P/E) ratio to go by (think those red-hot IPOs that tend to be oversubscribed).
The TSX Index is thriving. Big dividend payers could keep doing well.
Though time will tell, I think the TSX Index has a good shot of doing well in 2026. There’s more value to be had, not only in the yield-rich energy and financials, but also in the consumer staples and even tech. At this juncture, I’d stand by the Canadian banks, which, I think, offer the best of both worlds right now (capital gains plus dividends). And, of course, with great growth comes more in the way of dividend hikes.
Sure, it’s been a fantastic year for the big banks, but I don’t think it’s time to ring the register. Of the Big Six banks, I like all of them, and the BMO Equal Weight Banks Index ETF (TSX:ZEB), I think, stands out as the perfect play. The dividend yield sits at 3.3% and with an equal weighting in each one of the six big Canadian banks, you can simply buy and hold the one-stop shop as you bank on more performance in Canada’s best financials. While there’s always a better bank for your buck, I do think that the macro environment could cause all six boats in the banking waters to continue rising into the new year.
