Key Takeaways
- The stock market’s second-quarter gains were twice as large as the first quarter’s, amid the Middle East conflict and economic weakness, analysts say.
- Financial services led gains, while energy and basic materials were notable drags with negative quarterly returns.
- Bond yields fell as the central bank remained on hold, while the loonie weakened against a rebounding US dollar.
Canadian stocks extended their recent gains during the second quarter of 2026 as expectations that the Bank of Canada would raise rates this year faded, lifting financial stocks. At the same time, the belief that the central bank will now keep rates steady for an extended period led to a weakening dollar and a rise in bond prices.
The Morningstar Canada Index advanced 6.59% in the second quarter, which followed a 3.8% gain in the first. The Canadian stock market is up 30.95% over the past 12 months. The rally came despite energy stocks falling alongside oil prices in response to an agreement between the United States and Iran to end their conflict and restart shipping through the Strait of Hormuz.
Meanwhile, bond prices rose and yields fell from mid-May peaks on the shifting outlook for Bank of Canada policy. The yield on the Government of Canada 10-year bond fell to 3.38% at the end of the quarter from 3.50% at the start, peaking at 3.70% during the quarter.
As investors turned away from forecasting rate hikes, thanks to data showing a weakening economy, the Canadian dollar weakened. This was also driven by expectations that the Federal Reserve could raise rather than lower rates in 2026. The loonie ended the quarter at $1.42 against the US dollar, its weakest level in over a year, after starting the quarter at $1.39.
Canadian Stocks Build Gains in Q2
It was another strong quarter for the stock market, even as a key trend that fueled first-quarter gains reversed. Canadian bank stocks led the charge, but the gains were somewhat offset by declines in energy and basic materials, due to their heavy weightings in the Canada Index. These sectors had soared in the first quarter amid the oil shock linked to the Iran war, while financial services stocks suffered as fears of higher interest rates drove up bond yields.
“The first quarter was dominated by the geopolitical and commodity shock, while the second quarter became more of an earnings resilience trade, led by financials and followed by industrials and technology,” says Ben Jang, portfolio manager at Nicola Wealth.
The performance was also fueled by industrials and technology stocks, which gained traction as investors rotated into these sectors amid the AI infrastructure buildout and broader tech momentum.
Financials, which have by far the largest weighting in the Canadian stock market at 36.95% of the Canada Index, provided the biggest lift. “Domestic banking remained resilient, net interest income held up, and capital market, trading, and wealth management businesses provided meaningful growth,” Jang says. “Most importantly, credit deterioration was more manageable than investors had feared.”
Stocks That Led Market Gains in Q2
All five stocks that made the largest contribution to the index’s quarterly return came from the banking sector. Canada’s biggest bank by assets, Royal Bank of Canada RY, made the greatest contribution, adding 2.19 percentage points to the Canada Index’s overall quarterly gain of 7.14%. At 8.49%, the stock has the largest weighting in the index.
Canada’s second-largest lender, TD Bank TD, which represents 5.97% of the Canada Index, contributed 1.62 percentage points to its quarterly gain. Bank of Montreal BMO, Bank of Nova Scotia BNS, and Canadian Imperial Bank of Commerce CM round out the top five contributors.
“RBC, TD, and CIBC all exceeded second-quarter profit expectations, with personal and commercial banking earnings growing and capital-markets profits rising,” says Nicola Wealth’s Jang. “Other major banks also reported better-than-expected results.”
Stocks That Weighed on the Market in Q2
The stocks that detracted the most from the Canada Index were split between basic materials and energy companies. Gold miner Agnico Eagle Mines AEM plunged 21.76% in the quarter. It’s the ninth-largest holding in the index, and the stock’s 2.74% weighting was the biggest drag on its performance. Energy stocks Canadian Natural Resources CNQ and Suncor SU also suffered double-digit losses, making them the second and third most impactful detractors, respectively. Mining companies Kinross Gold K and Wheaton Precious Metals WPM round out the list. They contributed to the basic material sector’s 12.20% quarterly loss, which subtracted 2.35 percentage points from the index’s second-quarter performance.
Energy’s loss in the quarter mirrored its first-quarter surge, according to Nicola’s Jang. “The first quarter was a scarcity and geopolitical risk trade. Investors paid a premium for producers as oil supplies and the Strait of Hormuz appeared threatened,” he says. “Once the US–Iran [peace] framework emerged, that risk premium came out of crude prices extremely quickly. Energy shares then gave back part of an exceptionally strong first-quarter run.”
Bond Yields Drifted Lower
During the second quarter, bond yields steadily eased as softer-than-expected domestic data—a surprise contraction in gross domestic product and a still-softer labor market—took hold. While inflation spiked due to higher energy prices driven by the Iran war, core measures (which strip out food and energy prices) remained contained. Consequently, the Bank of Canada held rates at 2.25% for a fifth consecutive time, signaling a bias toward rates for longer rather than hiking.
Against that backdrop, Government of Canada two-year bond yields slid to 2.74% from 2.82% since the start of the second quarter. The yield on five-year bonds saw a similar pullback to 3.01% from 3.11%, while 10-year bonds eased to 3.38% from 3.50% as of June 29.
The Loonie’s Losses Stack Up
It was another quarter of weakness for the Canadian dollar, which continued to lose ground to the US dollar. The loonie started the second quarter at $1.39 against the greenback and soared to its quarterly peak of $1.36 by the first week of May. But then it reversed course and ended the quarter at $1.42—a level last seen in April 2025—as the US dollar staged a powerful recovery, driven by investor expectations of US Federal Reserve rate hikes this year.
The Canadian dollar could keep lagging, held back by lingering trade deal uncertainty and signs of divergence between the two central banks, even as hopes of a final Iran peace deal rise.
