'Canada is a more cyclical market than the United States': Belski

Key Concepts

• Multiple Expansion vs. Earnings-Driven Markets: The shift from market growth fueled by increasing price-to-earnings ratios to growth driven by actual company earnings.
• Cyclical vs. Secular Growth Markets: Canada being a more cyclical market (tied to economic cycles) versus the US being a more secular growth market (consistent growth regardless of cycles).
• Dispersion in AI: The idea that not all companies involved in AI will benefit equally, and specific themes within AI will emerge.
• Resilient Canadian Consumer: The strength and continued spending power of Canadian consumers.
• Over-Reserving Banks: The temporary boost in bank earnings due to previously accumulated excess capital.

Market Outlook for 2026: A Shift to Earnings-Driven Growth

Brian Bowski, CEO and CIO of Humalis Investment Strategies, anticipates positive but more moderate returns for both the Canadian and US markets in 2026. He notes Canada experienced its best absolute performance since 1990 last year, largely driven by the materials sector, particularly gold. However, he believes this relative outperformance will likely wane due to the more diversified nature of the US market and a general cooling of momentum.

The Transition from Multiple Expansion to Earnings Growth

Bowski emphasizes a key shift in market dynamics. For the past four years, North American markets have been propelled by multiple expansion – an increase in the price investors are willing to pay for each dollar of earnings. He explains, based on 36 years of historical analysis and backtesting, that while still positive, earnings-driven markets are typically less powerful than those fueled by multiple expansion. He states, “We found in our back testing and our analysis that that principally multiple expansiondriven markets…are the most powerful…although still positive are not as powerful.” He advises investors to remain invested but to focus on high-quality companies, stating, “investors should not time the market, remain invested, and own the best kind of highquality companies in Canada that Canada has to provide.”

Anticipating Bumpiness and Cyclicality

Bowski predicts a “bumpier ride” in 2026 compared to the previous year, though he acknowledges last year was also initially volatile. He attributes this anticipated bumpiness to the transition from a momentum/valuation-driven market to an earnings-driven one. He highlights Canada’s more cyclical nature compared to the US’s secular growth profile, suggesting Canadian earnings growth will be less predictable. He observed that many investors sold US assets in April of the previous year and missed the subsequent rally, illustrating the dangers of attempting to time the market.

Investor Caution and Tactical Adjustments

Bowski doesn’t advocate for outright caution but stresses discipline and a process-driven approach. He suggests taking profits in sectors that have experienced significant gains, such as gold, and acknowledges the potential for diminishing returns from Canadian banks due to over-reserving – the release of previously accumulated excess capital that temporarily boosted earnings. He notes, “Most of that power…of the big five…has really been driven by those banks over reserving…over the short term that doesn't really last.” He recommends shifting from broad index investing (ETFs) to more selective stock picking.

Investment Themes for 2026

While acknowledging the validity of the AI theme, Bowski anticipates increased dispersion – meaning not all AI-related stocks will succeed. He identifies specific areas within AI poised for growth, particularly the utility space. He explains that AI and data centers require significant power, benefiting companies like Fortis and Canadian Utilities, which own the infrastructure for power delivery. He states, “how do companies…generate power? They plug themselves into the wall. Who owns the plugins? Well, Fortis and Canadian Utilities.”

He also presents a contrarian view on the Canadian communication services sector, believing it is currently undervalued and underowned. Furthermore, he highlights the strength of the Canadian consumer and recommends focusing on consumer discretionary stocks, specifically citing Aritzia and Dollarama as favorites due to their demonstrated resilience. He emphasizes the Canadian consumer is “excessively strong” compared to their US counterparts.

Logical Connections

The discussion flows logically from a broad market outlook to a detailed explanation of the underlying economic forces driving that outlook. The transition from multiple expansion to earnings growth serves as a central theme, connecting the anticipated bumpiness, the need for discipline, and the recommended investment themes. The emphasis on cyclicality explains the differing outlooks for Canada and the US.

Data and Statistics

• Canada’s 2023 Performance: Best absolute performance since 1990.
• Historical Analysis: Humalis Investment Strategies has 36 years of historical data and backtesting to support its analysis.

Conclusion

Brian Bowski’s outlook for 2026 suggests a shift from the high-growth, multiple-expansion environment of recent years to a more moderate, earnings-driven market. He advises investors to remain invested, prioritize discipline, focus on high-quality companies, and selectively target specific themes like AI-driven utilities and resilient consumer discretionary businesses. The key takeaway is a move towards a more nuanced and selective investment approach, recognizing that past performance is not necessarily indicative of future results.