Gold storms to new record on Fed uncertainty

Canadian Equities Outlook – 2026 & Beyond (Darren Deru, QV Investors)

Key Concepts:

• Valuation Expansion: Increase in stock prices not driven by earnings growth, but by investors’ willingness to pay more for each dollar of earnings.
• Price-to-Earnings (P/E) Ratio: A valuation ratio of a company’s stock price to its earnings per share.
• Synergies: Cost or revenue benefits resulting from the merging of companies or business units. (Revenue Synergies & Cost Synergies)
• Organic Growth: Growth achieved through internal efforts, such as increased sales or new product development.
• Inorganic Growth: Growth achieved through mergers, acquisitions, or other external factors.
• Cash Flow Generative: A business that produces a significant amount of cash relative to its investment.

1. Gold Market Analysis & Alternatives

Darren Deru acknowledges the recent surge in gold prices, noting that while technically “overbought” in the short term, it’s being driven by investor uncertainty regarding the US dollar. He emphasizes QV Investors’ strategy of not attempting to predict commodity price movements, but recognizes the potential for continued gold appreciation if concerns about falling US interest rates persist. However, he cautions against over-allocation to gold, advocating for diversified portfolios including alternative assets, particularly in Canadian small-cap stocks and global markets (excluding the US) where valuations have seen significant adjustments. He states, “Gold may be a piece of it [a portfolio], but looking at some of the other alternative stocks out there…we’re seeing some attractive opportunities.”

2. Canadian Market Performance & Valuation Concerns (2025)

The Canadian market (TSX) experienced a 31% return in the past year, with approximately 11% attributed to valuation expansion rather than earnings per share growth. This indicates the TSX has been “catching up” to US valuations, but remains below US levels. Deru stresses the need for careful sector selection, avoiding areas with all-time high valuations. He specifically cites grocery stores (Loblaws, trading at 27x P/E) as an example of a potentially overvalued sector. He identifies the transportation sector (Transforce, CN, CP Rail) as presenting attractive opportunities due to current weakness in those stocks despite their high quality.

3. Canada-China Trade & Electric Vehicle Discussions

The upcoming Prime Minister’s visit to China, accompanied by Mark Carney, is viewed as a positive step after a long hiatus in high-level dialogue. While the specifics are uncertain, Deru anticipates discussions will focus on securing access for Canadian agricultural exports, potentially requiring concessions in other areas, including electric vehicles (EVs). He believes a negotiation would be beneficial for Canada, stating, “we are interested in some sort of deal that allows some of our farm products to be exported.” The concerns of Ontario’s auto manufacturing base regarding potential tariff reductions on Chinese EVs are acknowledged.

4. Stock Picks & Rationale

• National Bank: Deru highlights National Bank’s strong capital position and its strategic use of capital through acquisitions (Laurentian Bank portfolios and Canadian Western Bank – CBB). The CBB acquisition is expected to generate $200-250 million in revenue synergies, as recently reported by the bank. He believes this provides continued opportunity for growth.
• WSP Global: WSP, an engineering company, is favored due to the increasing number of fast-tracked projects globally, particularly in Canada. The company is highly cash flow generative, requiring limited capital investment as it’s a “people business.” WSP has demonstrated mid-single-digit organic growth alongside strategic acquisitions (most recently TRC Companies for $3.3 billion USD). This combination has resulted in strong earnings growth and increasing operating margins (currently around 14-15%). He notes the company is experiencing “meaningful organic growth going forward” and that “the cost per employee is coming down” due to acquisitions. The stock has a strong analyst rating with “12 buys and one hold.”

5. Technical Details & Financial Metrics

• TSX Return (2025): 31%
• Valuation Expansion Contribution to TSX Return: 11%
• Loblaws P/E Ratio: 27x
• National Bank – CBB Acquisition Synergies: $200-250 million (revenue)
• WSP Global – TRC Companies Acquisition: $3.3 billion USD
• WSP Global – Operating Margins: 14-15%

6. Logical Connections & Argumentation

The conversation flows logically from a broad market overview (gold, Canadian equities) to specific investment opportunities. Deru consistently emphasizes the importance of valuation as a key driver of investment decisions. He argues that while the market has seen gains, investors should be cautious about overvalued sectors and focus on companies with strong fundamentals and potential for future growth. The discussion of Canada-China trade is presented as a potential catalyst for specific sectors, while the stock picks are justified by detailed analysis of company financials and strategic positioning.

Conclusion:

Darren Deru presents a cautiously optimistic outlook for Canadian equities in 2026. While acknowledging market gains, he stresses the importance of valuation discipline and diversification. He advocates for a focus on companies with strong fundamentals, strategic growth opportunities, and the ability to generate cash flow. His stock picks – National Bank and WSP Global – are supported by detailed analysis of their financial performance and strategic initiatives, positioning them as potentially attractive investments within a broader, diversified portfolio. He emphasizes that while gold may offer a safe haven, it should be considered as one component of a well-rounded investment strategy.