Key Takeaways
- The Canadian stock market is poised for a positive but choppy fourth quarter, analysts say.
- Basic materials and energy are expected to lead, while earnings expectations could weigh on financials.
- Trade uncertainty and bond yields are seen as the biggest risks heading into year-end.
The Canadian market’s third-quarter advance, powered by basic materials, may be harder to sustain in the final quarter of 2026, analysts say. Elevated inflation, the prospect of higher interest rates, and trade uncertainty have raised the bar for further gains.
The Morningstar Canada Index rose 1.94% in the quarter, with a 12.84% gain in basic materials stocks doing most of the heavy lifting on the back of rising gold prices. Stocks now head into the fourth quarter up more than 11%, matching the US market. But analysts caution that continued headwinds will make gains difficult.
“It’s going to be choppy and volatile as we head into an uncertain period for central banks, higher interest rates, the US midterm elections, and geopolitical tensions in the Middle East and Russia,” says Greg Taylor, chief investment officer at PenderFund Capital Management.
Meanwhile, Canadian bond yields across maturities rose through the third quarter, thanks to persistent energy-driven inflation linked to the war in the Middle East, surging US Treasury yields, and mounting trade pressures. The yield on 10-year Government of Canada bonds has jumped to 3.99% from 3.45% at the start of July. Meanwhile, the yield on the two-year government bond stands at 3.37% (up from 2.76%) as of Sept. 29.
Basic Materials Could Continue to Lead
At a 19.1% weighting in the Morningstar Canada Index, the basic materials sector is the market’s second-largest constituent, making its performance a key driver of overall returns. The sector’s stellar third-quarter performance added 2.11 percentage points to the index’s gain in the period, the greatest contribution by any sector.
Gold producer Agnico Eagle Mines AEM surged 18.54% in the quarter. Other leading performers were Wheaton Precious Metals WPM, with a 19.28% gain, and Barrick Mining ABX with 11.40%.
But investors must temper expectations for another blowout quarter for these stocks, according to Jack Nguyen, portfolio manager at Verecan Capital Management. He remains “very constructive” on basic materials, but “because of such a strong performance in the third quarter and the year to date, the bar is quite high now.”
Sadiq Adatia, chief investment officer at BMO Global Asset Management, expects rising bond yields to continue to fuel demand for gold in the fourth quarter. Spot gold prices reached a record high of nearly USD 5,600 per troy ounce in late January. While prices have eased since then, they remain elevated at close to USD 4,200 an ounce. “People use [gold] as a proxy for fixed income, to hedge against equity risk,” Adatia explains. “So I do see momentum continuing in basic materials.”
Energy Gains May be Harder to Sustain
Energy stocks have had a strong run in 2026, rising 3.33% in the third quarter and 27.82% year to date, driven largely by the oil shock from the Iran war. After the war broke out in February, Brent crude prices shot as high as USD 120 a barrel from around USD 60 at the start of the year. Although some of those gains have since been pared back, oil remains elevated at roughly USD 99 a barrel, providing a tailwind for energy stocks.
If oil prices stabilize, analysts say further gains could be limited. “The USD 100 a barrel cap [for Brent crude] seems to be the level we’re sitting at,” says Adatia. “That leaves a little bit of upside for energy, but not significant.” He says his outlook would have been more bullish if China’s oil demand had not eased, preventing oil from soaring to USD 120-USD 150 a barrel.
While crude oil remains the largest driver, natural gas is seen as a crucial secondary engine of Canada’s energy complex. PenderFund’s Taylor sees natural gas stocks picking up momentum as winter approaches. “The big thing for Canada is that we still have to keep to natural gas, [which] has done as well as oil,” he says. “Whenever the natural gas has its seasonal rally, which it tends to in the fourth quarter, that’d be a big event to help these companies.”
Uncertainty Looms for Financials
The financial sector, the market’s largest constituent at a 34.66% weighting, has lost some of the momentum it enjoyed earlier in the year. While it’s still up over 20.15% so far this year, the sector fell 2.82% in the third quarter.
Analyst expectations for bank stocks are muted heading into the fourth quarter. “Financials still can go higher, but I don’t think they’re going to the levels that we expect to see on the metals side, because [of] the kind of momentum we’ve seen already this year on some of those names,” says BMO’s Adatia. He points out that investor expectations for bank earnings have risen to levels already reflected in current stock prices. Adatia sees limited scope for further expectation-driven gains.
While the Bank of Canada has left its policy rate unchanged at 2.25% since December, Verecan’s Nguyen notes that investors are pricing in a rate increase this year, following the US Federal Reserve’s hike last month. A scenario in which persistent inflation forces the Bank to tighten policy while the economy is struggling would create a “headwind against the strong margin expansion for the banks.”
For Canadian lenders with US operations, a potential bright spot could be a new wave of high-profile initial public offerings stateside, explains PenderFund’s Taylor. He cites Royal Bank of Canada RY as an example where a Canadian bank was involved in the historic SpaceX SPCX IPO underwriting. “Big IPOs could really kick off capital markets activity, and that’s a big positive driver for these banks,” he says.
The Risks Shaping the Final Quarter
Domestically, the spiraling trade war with the United States is a key threat, says BMO’s Adatia. “That is a big cloud over Canada at the moment,” he says. “That is the one that the manufacturing side is really watching carefully and deciding whether [to] leave for the US.”
Businesses need clarity on tariffs to calibrate their outlook and adjust their plans accordingly, Adatia says. “Until that happens,” he adds, “we’re not going to see a lot of growth in jobs.”
PenderFund’s Taylor is tracking bond yields and their drag on risk assets like equities: “The market has been trading in tandem with bond yields, and if yields do start to have a meaningful move higher, that would be negative for risk assets across the board.”
Investor expectations could also make the fourth-quarter backdrop more challenging, particularly for stocks that performed strongly in the third quarter, according to Verecan’s Nguyen. Following a particularly strong earnings streak, “a company can report great results, and people still see the stock struggle just because investors have a different set of expectations.” Basic materials are particularly exposed to elevated investor expectations heading into year-end, he cautions.
