Canada’s major banks are approaching their fourth-quarter earnings season with valuations that have climbed even higher than earlier in the year, raising debate about whether the market has become overly optimistic. In the previous quarter, analysts were concerned that rising share prices lacked fundamental support, yet nearly every major bank surpassed profit expectations. This strong performance has only fueled further gains, setting the stage for a pivotal December earnings period.

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These results arrive against a backdrop of uneven economic performance. The national economy contracted in the second quarter and is expected to show only a modest rebound in the third. Unemployment remains elevated, and broader uncertainty—driven largely by shifting international trade dynamics—continues to weigh on business investment and housing activity. Consumer demand has softened, and borrowing growth across the banking sector has remained subdued.

Despite these challenges, analysts expect the banks to deliver another solid quarter, supported by strength in capital markets, wealth management, and diversified business lines. Provisions for potential loan losses, which surged during periods of heightened trade risk, are not expected to rise materially. At the same time, interest rate cuts earlier in the fall have eased pressure on borrowers, stabilizing credit quality.

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Bank valuations, however, have soared. The sector is currently trading at price-to-earnings multiples well above long-term averages, driven in part by aggressive share repurchases. Bank stocks have outperformed the broader market significantly, lifting valuations to levels not seen since before the global financial crisis. Some analysts argue the sector is now “fully priced,” offering limited buffer for downside surprises in 2026.

Others maintain a more constructive long-term view, suggesting that expected economic acceleration over the next few years could bring valuations closer to sustainable levels by 2027. They also argue that today’s banks are better capitalized and more resilient than in past economic cycles, reducing structural risk.

Still, multiple uncertainties remain. Upcoming trade negotiations with major global partners, unpredictable policy shifts from the United States, and an unclear global economic trajectory could all influence credit conditions and profitability. As earnings season begins, investors will be watching closely for signals about whether strong bank performance can continue into a more volatile 2026.