Key Takeaways
- Oil prices could remain elevated despite the Iran peace deal, according to analysts.
- Stable rates could fuel bank stocks, but utilities and real estate face headwinds until the central bank resumes cuts.
- Trade uncertainty will continue to drag on Canadian exports and the economy.
So far, it’s been a solid year for Canadian stocks, with equities benefiting from higher oil prices and gains on financials. Even with a retreat in energy prices, analysts say the outlook for the second half of 2026 is solid. Supporting this, one key element they see is that the Bank of Canada is expected to hold interest rates steady amid mixed signs for the economy, which should help financial stocks.
The financial and energy sectors are most critical to the performance of the Canadian stock market. The Morningstar Canada Index is up 9.5% so far in 2026, with the Morningstar Canada Energy Target Market Exposure Index up 26.6% and the Morningstar Canada Financial Services Target Market Exposure Index up 22.3%. A nagging wild card comes from trade negotiations with the United States. Still, many analysts have a constructive outlook.
“The near-term outlook for Canadian equities is cautiously constructive, but the market’s leadership has shifted from commodity momentum to earnings resilience, with financials doing much of the heavy lifting,” says Ben Jang, portfolio manager at Nicola Wealth.
The Tailwind of Higher Oil Prices and Demand for Commodities
For much of the first half of 2026, the rise in oil prices triggered by the Iran war was a tailwind for the Canadian stock market. Energy accounts for 17.7% of the Canada Index, making it the third-largest constituent after financial services (more than 34.0%) and basic materials (roughly 18.0%).
Oil prices have fallen after the US-Iran peace deal, even as the ceasefire has been repeatedly broken. Prices for international benchmark Brent crude have slipped back to USD 72 a barrel, not far from their prewar levels. Still, some analysts believe elevated oil prices could persist, since the interim US–Iran framework is not a final, enforceable peace.
“The biggest near-term risk is that markets have priced the settlement before the difficult issues—nuclear inspections, sanctions relief, and the durability of shipping through the Strait of Hormuz—have actually been settled,” says Nicola Wealth’s Jang.
Sam Mitter, portfolio manager at Ninepoint Partners, says the Canadian market’s favorable exposure to oil prices still has room to play out. For that reason, he maintains “an overweight [position] in the energy sector, given inflationary pressures and the evolving impact of the Iran conflict.”
Despite the recent pullback in oil prices, Canada’s energy story remains intact, says David Doyle, head of economics at Macquarie Group. He points to the government’s push to boost energy production through significant infrastructure investment as another positive for energy prices.
Stable Rates to Buoy Bank Stocks
The Bank of Canada has held interest rates steady at 2.25% for five consecutive meetings, including four this year. The Bank is widely expected to remain on the sidelines through year-end as it balances the opposing forces of higher inflation and slower economic growth.
The consistent rate is a boost for bank stocks, says Jack Nguyen, portfolio manager at Verecan Capital Management. “Banks benefit from a predictable lending environment, and sectors such as financials could remain relatively resilient,” he says.
At the same time, a rate cut could drive stronger gains in financial stocks, particularly if long-term bond yields remain elevated, says Philip Petursson, chief investment strategist at IG Wealth Management. When long-term yields become much higher than short-term yields (a dynamic known as a steepening yield curve), banks tend to benefit from borrowing cheaply while lending at a premium. The yield curve is a graphical representation of government-bond yields across different maturities. “The yield curve has steepened over the past three years,” Petursson says. “Further steepening would provide a boost to financials.”
Lower Rates Could Fuel Rate-Sensitive Sectors
While a year-end hold remains the baseline expectation for the Bank of Canada, IG Wealth’s Petursson says that if worsening economic growth forces the Bank to lower interest rates, it “would be beneficial to rate-sensitive sectors, including utilities and real estate.”
These sectors comprise dividend-paying stocks that investors tend to favor in a lower-interest-rate environment as an alternative to fixed-income investments. “Sectors that are viewed as bond proxies, such as utilities, telecoms, and real estate, may find it more difficult to attract incremental investor interest without the prospect of lower interest rates providing a valuation tailwind,” says Verecan’s Nguyen.
Trade Uncertainty Remains
Canadian businesses continue to face uncertainty surrounding a US trade deal, particularly in light of US President Donald Trump’s threat to nix the Canada-United States-Mexico Agreement, the continental free-trade treaty, amid ongoing renewal talks.
Tony Stillo, head of Canada economics at Oxford Economics, sees a middle-ground outcome as most likely, wherein “the US will decide not to extend the CUSMA on the July 1 renewal date rather than withdraw entirely from the agreement.” If that happens, the existing CUSMA treaty moves into a period of mandatory annual joint reviews.
But if negotiations turn sour and the trade framework collapses, “Canada would fall into a recession in late 2026, and the Bank of Canada would likely cut the policy rate to 1.75% to support the economy,” Stillo says. A lack of clarity could negatively impact export-driven sectors that remain particularly vulnerable to trade headwinds, including automotives, lumber, and steel.
Meanwhile, a failure to renew could lead to “weaker investment, softer export confidence, and more pressure on already-fragile growth,” warns Mackenzie’s Reid.
