TSX continues bull run, what's driving the gains?

Key Concepts

• TSX Rally: The Toronto Stock Exchange's upward movement, driven by technology and energy sectors.
• Financials: A sector contributing to the TSX's gains, with bank reporting expected soon.
• Energy Sector: A "decent story" in Canada, but a global "lagard" (underperformer) year-to-date.
• Market Darling Sectors: Sectors that have performed exceptionally well over the past year or more.
• Volatility: Fluctuations in market prices, seen as healthy rotation.
• AI Trade & AI Adjacent Trade: Investments related to Artificial Intelligence and supporting technologies.
• Discerning Investors: Investors becoming more selective in their stock choices, focusing on profitability and debt.
• Oracle vs. Nvidia: An example illustrating investor discernment, with Oracle's profitability and debt management being a key factor.
• 2026 Theme: A constructive but realistic view of equity markets, acknowledging past gains and avoiding expectations of "exuberant returns."
• Earnings Growth: The justification for market advances, with a focus on areas that need to "grow into their earnings."
• Underdog Sectors: Sectors that have not participated in the recent bull market run.
• General Purpose Technologies: Technologies like the steam engine, internet, and AI that have a broad impact on society and markets.
• Productivity Transmission: The process by which innovation translates into economic gains for the broader economy.
• Healthcare Sector: A sector that has underperformed, with a 4% compound return over three years, lagging behind the bond market.
• GLP1s: A type of drug, likely referring to glucagon-like peptide-1 agonists, which have advanced the healthcare sector.
• Aging Demographics: A global trend contributing to the healthcare sector's importance.
• Energy Sector (Global): Has been "pretty flat" for the past three years, despite fluctuations in oil prices.
• Reflation: A resurgence of economic activity.
• Real Estate Sector: Another sector that has been "downtrodden."
• Stretched Valuations: When asset prices are considered too high relative to their underlying value.
• Depressed Markets: Markets that have experienced significant declines.

TSX Rally and Market Dynamics

The TSX (Toronto Stock Exchange) experienced a rally, primarily fueled by gains in the technology and energy sectors. While American markets were closed for Thanksgiving, the TSX showed strength. Financials have also been a contributing factor, with upcoming bank reporting expected to provide further insights. The energy sector, while a "decent story" in Canada, has been a global "lagard" (underperformer) year-to-date. The TSX has been a "market darling" this year, with inflows into Canadian stocks and bonds, partly attributed to a "deficit story."

Investor Behavior and Market Outlook for 2026

Following recent volatility, the market is exhibiting a "healthy rotation" from sectors that have been dominant for an extended period. This has led to investors becoming more discerning, moving away from a "rally in everything" mentality. The focus is shifting towards identifying companies with clear profit potential and manageable debt, exemplified by the comparison between Oracle and Nvidia.

The outlook for 2026 is described as constructive but realistic. The past three years have seen significant equity market gains, and the expectation is not for "exuberant returns." Instead, the market is seen as being "justified by a lot of earnings growth." However, there's an acknowledgment that some areas may need to "cool a little bit or or grow into their earnings." The recent market action provides "comfort" that investors are indeed becoming more disciplined.

The Evolution of AI and its Economic Impact

While the AI trade and AI adjacent trade have seen significant interest, the perspective is that some of these stocks were "getting ahead of themselves." Investors are now being more selective, looking at where profits will materialize and who can "monetize this quickly."

The future trajectory of AI is not seen as a "calamity" but rather a "softening or flattening of the trajectory." The key question for AI, as with previous general purpose technologies like the steam engine and the internet, is how its productivity will be transmitted to the "everyday run-of-the-mill regular economy." This broadening deployment of AI across "regular businesses" and the "old economy" is considered the "exciting story" for the future.

Underdog Sectors Poised for Catch-Up

The past three years have seen a divergence in market performance, with some sectors significantly outperforming while others have lagged. The starting point of 2022, which saw a "bare market" and many depressed areas, is important to consider.

Healthcare Sector

The healthcare sector has been largely ignored, posting only a 4% compound return over the past three years. This performance has not even kept pace with the bond market, despite advancements like GLP1s and global aging demographics.

Energy Sector

Globally, the energy sector has been "pretty flat" for the past three years. While Canadian energy has seen some improvement, the global picture remains subdued. The current low oil prices are beneficial for consumers, but a modest increase in oil prices (e.g., $10-$15) could significantly boost the energy sector without necessarily disrupting inflation or the consumer, especially if there is a reflation in the global economy driven by government and business spending. The sector is also considered "cheap on a global basis."

Real Estate Sector

The real estate sector is another area that has been "downtrodden." While there are valid reasons for this performance, the key question is whether the "negativity is about to lift." A modest improvement in sentiment for these "three sectors" could lead to a "baton hand" from other areas of the market that may need to "slow down and take a breather."

Conclusion

The market is transitioning from a broad rally to a more discerning phase, with investors focusing on profitability and sustainable growth. While AI continues to be a significant theme, its broader economic impact is yet to be fully realized. Underdog sectors like healthcare, energy, and real estate, which have lagged in recent years, present potential opportunities for catch-up in 2026, particularly if there is a global economic reflation. The overall outlook for equity markets is constructive but tempered by the recognition of past gains and the need for realistic earnings expectations.