Canadian equities in Q3 2026: Narrow leadership and an uneven recovery

Garey, can you begin by commenting on the Canadian equity market in the third quarter of 2026?

Canadian stocks rose for the ninth quarter in a row, although gains were modest. The S&P/TSX Composite Total Return Index increased 1.6% in Q3, following a 7.0% rise in Q2. The positive result masked a weaker finish to the quarter and gains concentrated in a small number of companies.

Only three of the market's 11 sectors rose: Information Technology (+17.9%), Materials (+12.9%) and Energy (+3.3%). Communication Services (−9.3%), Real Estate (−7.4%), Utilities (−7.2%) and Consumer Staples (−7.0%) had the largest declines. Financials fell 3.0% after a strong 25.6% gain in Q2.

A relatively small group of large companies accounted for much of the index's gain, while the typical stock declined. Investors favoured some gold producers and technology companies linked to artificial intelligence (AI), but were more cautious about businesses facing uncertainty from AI, interest rates or trade policy.

Three developments shaped the quarter: Canada–U.S. trade talks broke down in August, disruptions to Middle East oil supply pushed energy prices higher, and central bank policies diverged. The U.S. Federal Reserve raised interest rates in September while the Bank of Canada held its rate steady. Higher long-term bond yields weighed on sectors that are particularly sensitive to borrowing costs.

U.S. stocks performed slightly better. The S&P 500 Total Return Index gained 2.3% in U.S. dollars, or approximately 2.4% in Canadian dollars. U.S. Energy (+17.2%) and Technology (+7.2%) led, while Utilities (−12.4%) and Industrials (−9.7%) declined.

Canadian equities have gained 20% over the past twelve months, but the advance has been unusually narrow. How concentrated has leadership been, and what do you make of valuations in the areas that led?

The S&P/TSX Composite Total Return Index gained 20.0% over the past 12 months, but the gains were concentrated in three sectors. Financials (+31.9%), Energy (+29.9%) and Materials (+23.7%) together accounted for 94.7% of the index's return, even though they represented 64.6% of the index a year earlier. The other eight sectors gained just 3.2% combined. Those three leading sectors now make up 69.1% of the index, compared with 64.6% a year ago.

Different factors supported each leading sector. Gold producers benefited when gold prices rose, although both gold and oil prices were volatile. Energy companies gained from higher oil prices following supply disruptions in the Middle East, as well as a more supportive outlook for project approvals and infrastructure development. At the start of the year, many investors had expected oil prices of about US$50–60 per barrel.

Canadian banks were especially strong, returning 44.6%. Much of the increase reflected investors' willingness to pay more for bank shares, rather than growth in bank earnings. Banks were trading at about 14.7 times expected earnings, above their 20-year average of 10.8 times, although below a recent peak near 16 times. This suggests investors have high expectations for bank finances, credit conditions and profitability.

Canada–U.S. trade talks broke down in August despite hopes for progress. What happened, and how is Canada responding?

Canada–U.S. trade talks created uncertainty throughout the summer. There was some optimism in mid-August that the countries might reach an agreement to reduce or avoid tariffs, but disagreements over key industries and concessions prevented a deal. Talks broke down around August 22, leaving the trading relationship uncertain.

The new tariffs affect about 5% of Canada's exports to the U.S., but they add pressure to industries already facing weaker demand and earlier tariffs. Government support measures represent about 0.2% of Canada's economy, as measured by gross domestic product (GDP). Businesses may still delay hiring or investment while they wait for greater clarity, including the upcoming review of the Canada–United States–Mexico Agreement (CUSMA).

The breakdown in talks has added urgency to Canada's efforts to sell more goods and services beyond the U.S. Canada has set a goal of doubling exports to non-U.S. markets by 2035 and is building relationships with trading partners in Europe, Asia and elsewhere. These markets cannot quickly replace the U.S., but expanding trade relationships could make Canada's economy more resilient over time.

Energy and transportation projects could help Canada reach new customers. Announcements this summer included a large data centre, liquefied natural gas (LNG) expansion, and upgrades to electricity transmission and ports. On October 1, after quarter-end, the federal government designated a proposed West Coast oil pipeline as a project of national interest, allowing it to move through an accelerated review process. That designation does not mean the pipeline has been approved for construction, but projects of this kind could eventually improve access to overseas markets.

Oil prices climbed again in the third quarter amid renewed Middle East disruption. What drove the move, and what did it mean for Canadian Energy?

Oil prices rose sharply again in Q3 as renewed disruption in the Middle East raised concerns about global supply. West Texas Intermediate (WTI), a widely used North American oil benchmark, reached about US$106.75 per barrel in mid-September before falling to US$90.42 at quarter-end. That was still about 30% higher than its US$69.50 level at the end of Q2.

Canadian oil producers benefited from higher prices, but not to the same extent as some U.S. producers. Western Canadian Select (WCS), a benchmark price for heavier Canadian crude oil, also rose, but its discount to WTI widened. In other words, many Canadian producers received less of the increase in global oil prices. That helps explain why the Canadian Energy sector gained 3.3%, compared with 17.2% for the S&P 500 Energy sector. Access to pipelines and other transportation infrastructure remains important for the prices Canadian producers receive.

The team remains positive about the longer-term outlook for Canadian Energy, supported by progress on project approvals and infrastructure. Better access to markets could help producers receive stronger prices for their oil and make future investments more attractive. Valuation remains important, even when commodity prices rise.

Gold staged another round trip in the third quarter. What drove it, and how did Canadian gold equities respond?

Gold prices moved sharply during Q3. Gold started the quarter near US$4,030 per ounce, dipped below US$4,000 in July, and rose to nearly US$4,660 in late August as investors sought safety amid trade tensions and disruption in the Middle East. Prices then fell back as market confidence improved and the U.S. dollar strengthened. Gold ended the quarter at US$4,155.60 per ounce, a gain of 2.9%.

Several factors may continue to support gold over the longer term, including government debt concerns, central banks diversifying their reserves and geopolitical uncertainty. However, short-term prices can still move quickly as investors respond to currency changes, interest-rate expectations and shifts in confidence.

Canadian gold-mining shares performed better than gold itself. The Materials sector rose 12.9% during the quarter, helped by gold producers. When gold prices increase, miners' profits can sometimes rise even faster because many production costs do not increase at the same pace. The team remains selective, focusing on business quality, financial strength, management decisions and reasonable valuations rather than simply following rising gold prices.

Trade tensions and the prolonged Middle East conflict continued to shape the economic outlook. How did these pressures influence Canada’s economy and monetary policy during the quarter?

High energy prices added to costs for Canadian households and businesses during the quarter, increasing concerns about inflation. At the same time, the breakdown in Canada–U.S. trade talks made it harder for companies to plan investments and hiring, just as Canada's economy was beginning to improve.

Canada's recovery remained uneven. Figures released in Q3 showed that the economy grew at an annualized rate of 3.3% in Q2, supported by exports, consumer spending and business investment. But that improvement came before the latest trade tensions. Growth slowed over the summer, while borrowing costs and uncertainty continued to weigh on housing activity.

These mixed signals made interest-rate decisions difficult. The Bank of Canada kept its policy rate at 2.25%, balancing a still-soft economy against the risk that higher energy prices and tariffs could increase inflation. The U.S. Federal Reserve, meanwhile, raised its rate by 0.25 percentage points in September. Canada faced a difficult balance: the economy still needed support, but inflation risks limited the room to lower rates further.

The Canadian dollar also moved up and down. It rose 3.2% between the start of July and August 21 as hopes for a trade agreement grew, then fell when talks broke down. It finished the quarter roughly unchanged despite stronger commodity prices.

How did the major sectors of the S&P/TSX Composite Index perform in the third quarter of 2026?

The Canadian stock market posted a modest gain in Q3, but only three of its 11 sectors rose. The S&P/TSX Composite Total Return Index gained 1.6% for the quarter, although it fell 2.6% in September. That late-quarter decline erased part of the gains made in July and August.

Information Technology was the strongest sector, rising 17.9%. Shopify was a major contributor after reporting stronger results and providing guidance that helped ease some concerns about the impact of AI on its business. Investors also became more selective in how they assessed AI-related risks across technology companies.

Materials gained 12.9%, supported by gold-mining companies, while Energy rose 3.3%. Higher oil prices helped producers, but pipeline and other energy transportation companies were weaker as longer-term interest rates rose.

Several sectors declined. Communication Services fell 9.3%, Real Estate 7.3%, Utilities 7.2% and Consumer Staples 7.0%. Health Care, Consumer Discretionary, Industrials and Financials also posted losses. Higher bond yields hurt some businesses sensitive to borrowing costs. Overall, a small number of sectors and large companies drove the index's positive return rather than gains across the wider market.

How did the Franklin ClearBridge Canadian Equity Fund perform in the third quarter, and what drove the results?

The Fund delivered a positive return in the third quarter but lagged the S&P/TSX Composite Total Return Index. The main challenge was the portfolio’s allocation across sectors, while the selection of individual companies helped overall.

Energy was the strongest area relative to the benchmark. Holdings such as Cenovus Energy, Headwater Exploration and Parex Resources benefited from higher oil prices. In contrast, the portfolio was held back by exposure to Industrials and Consumer Staples, and by having less exposure than the benchmark to some of the strongest-performing Materials and Technology stocks.

Which holdings contributed most to the Fund’s returns, and which detracted?

Shopify was a leading positive contributor after results and guidance helped ease concerns about the impact of artificial intelligence on its business. Energy holdings, including Cenovus Energy and Canadian Natural Resources, also benefited from stronger oil prices. Precious metals holdings such as Franco-Nevada and Wheaton Precious Metals contributed as gold-related equities advanced.

Among the detractors, Brookfield Corporation, Alimentation Couche-Tard, ATS and TELUS faced company-specific challenges. Enbridge also came under pressure as longer-term bond yields rose. These examples illustrate how individual company developments can affect returns even when the broader market is positive.

Which investment decisions helped or hurt performance compared with the benchmark?

The Fund benefited from holdings such as Cenovus Energy, Franco-Nevada, Thomson Reuters and Headwater Exploration. It also benefited from having less exposure, or no exposure, to certain benchmark companies that declined, including TC Energy and National Bank.

On the other hand, not owning Suncor and having less exposure to Shopify hurt relative results when those shares performed strongly. Holdings such as ATS, Alimentation Couche-Tard and TELUS also weighed on relative performance. The examples reflect both the companies selected and the size of the Fund’s positions compared with the benchmark.

What changes did the team make to the portfolio during the quarter?

The team used differences in share-price performance to add to companies it believed offered more attractive value. New investments included Element Fleet Management, a fleet-management business, and PrairieSky Royalty, which provides exposure to Canadian energy activity through royalty interests.

The Fund also added to existing positions including ATS, Boyd Group, Enbridge, TransAlta, Colliers and Brookfield. To help fund these purchases, the team reduced holdings in several Canadian banks following strong share-price gains, and trimmed Cenovus Energy and CCL Industries. The changes were selective rather than a major shift in investment strategy.

How is the Fund positioned for the market environment ahead?

The team continues to emphasize companies with strong finances, durable businesses and attractive valuations. With market gains concentrated in relatively few sectors and stocks, it sees opportunities in businesses whose prices may not fully reflect their long-term prospects.

Over the past year, the Fund increased its exposure relative to the benchmark in Industrials, Materials and Energy, while reducing exposure to Utilities and Consumer Staples. The team believes these adjustments improve the balance of potential opportunity and risk while remaining consistent with its valuation-focused approach.