What a great year it has been for the TSX Indexwhich is up more than 21% year to date. And the best part is that there are still two months to go, and if you believe in the big comeback of the gold price after a rough last month, and in the continued strength of the big banks following the latest rate cut by the Bank of Canada, then I think there is a good chance that a Santa Claus rally this year will be very good for the Canadian stock market.
The TSX Index rally may have hit the brakes in recent weeks, but I think the next leg will be higher, especially considering that valuations are still much lower on average than they have been in recent weeks. S&P500 and certainly the technology and growth-weighted sectors Nasdaq 100 Index.
Either way, I believe the TSX Index is more than just a cheaper alternative to the S&P 500. With a wealth of commodities and energy exposure, you may also experience less volatility if the tech trade starts to show subtle signs of cracking. It has been a lost cause to be left out of tech stocks in the belief that AI is on the verge of disappearing.
More volatility in the technology sector should be expected in 2026. In my opinion, dividends seem like the perfect place to hide.
Bear markets are normal, and once the Bank of Canada potentially moves from rate cuts to a rate pause and eventually some rate hikes, there could be some disruptions that investors will have to deal with. If you can’t handle a 20% drop at some point in the next five years, you may want to take a step back and reevaluate your exposure. For younger investors, I think such a drop would be a wonderful gift, allowing investors to get more shares for less money as the AI revolution experiences a cooling off.
AI winters in stocks can and likely will happen, and the odds are, I think, increasing as investors punish companies that spend too much on the effort with too little to show. And those big AI promises may not be enough to justify higher multiples on several stocks. Either way, I think there are a lot of storm clouds for investors to keep in mind when it comes to the highest multiple growth stocks out there, especially those that don’t even have a price-to-earnings (P/E) ratio (think of those red-hot IPOs that are often oversubscribed).
The TSX index is booming. Large dividend payers could continue to do well.
Although time will tell, I think the TSX Index has a good chance of doing well in 2026. There is more value to be captured, not only in the return-rich energy and financial sectors, but also in consumer staples and even in the technology sector. At this point I would support the Canadian banks, which, I think, offer the best of both worlds (capital gains plus dividends) at the moment. And of course, high growth also comes more in the way of dividend increases.
Sure, it’s been a banner year for the big banks, but I don’t think it’s time to call the cash register. Of the Big Six banks, I like them all, and the BMO Equal Weight Banks Index ETF (TSX:ZEB) stands out to me as the perfect play. The dividend yield stands at 3.3% and with an equal weighting in each of the six major Canadian banks, you can simply buy and hold the one-stop shop while counting on greater performance in Canada’s best financial sector. While there is always a better bank for your money, I think the macro environment could see all six boats in the riparian waters continue to rise in the new year.
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