As the calendar turns to 2026, Canadian stocks are likely to take a cautious turn. This is because of a mix of policy uncertainty and housing stress that will probably keep risk appetite low through the first quarter.
The S&P/TSX Composite is very sensitive to changes in domestic credit and commodity prices because the market is leaning toward banks, energy, and miners.
It can just as easily make things worse when the economy slows down and borrowers feel the pinch.
In September, the Bank of Canada started to ease its policy rate, lowering it to 2.5%.
The move was a step forward from the restrictive conditions that investors have had to deal with since 2022, but officials have said that the way forward depends on data and that inflation pressures need to stay under control.
More Read
We will look at the Monetary Policy Report and the rate decision from October 29 to see how quickly policy could move toward neutral and how the Bank sees credit transmission through 2026.
Any message that cuts will happen more slowly than the markets want would make the stock market sound even softer.
The national market in Canada cooled down through 2025 as a wave of mortgage renewals hit. This was due to rising carrying costs, lower job growth, and affordability issues.
More Read
The most recent outlook from the federal housing agency says that prices will drop slightly this year, then stabilize and slowly rise again in late 2026 as rates fall and supply gets better.
That order suggests that housing-related spending and building might still be weak in the first few months of 2026 before things pick up.
That makes the TSX look bad for big banks’ credit costs and fee income, and it also makes people less excited about cyclicals that focus on domestic markets.
The banking regulator has made it clear that it is focused on safe mortgage underwriting, which includes measures like loan-to-income ratios and risk management for variable rate products with fixed payments.
More strict oversight doesn’t mean a credit crunch, but it can slow down the growth of new loans and keep lenders cautious until household balance sheets look stronger.
Equity investors will be very interested in the fourth-quarter bank results and the guidance for the first half of 2026 on provisions, net interest margins, and capital deployment.
More Read
The macro environment isn’t completely hostile, but it’s more of a grind than a glide. The IMF thinks that the world economy will grow by about 3% in 2025 and 2026, at about the same rate as it does now, even though there are still trade problems and policy uncertainty.
That kind of environment is good for Canada’s energy and materials industries, but only if commodity prices stay high and China’s demand doesn’t drop any more.
If copper prices go up because of supply problems, metals exposure gives the TSX some protection.
Still, those offsets might not be enough to make up for weak credit and spending in the US early next year.
In the near term, price movements show that the market is looking for direction after a summer of strong but uneven tariffs.
The TSX stopped just short of a record high as traders thought about U.S. inflation signals and the direction of Canadian rates.
Money markets are still expecting more cuts in the next year, but bond prices are still very volatile, and liquidity problems have come up from time to time.
As quantitative tightening came to an end in September, the repo market in Canada showed signs of stress. This is a reminder that policy changes don’t always go in a straight line.
Net worth went up with stocks and home values earlier this year, and in the second quarter, Canadian household net worth went up even more.
But renewal shocks are spread out over 2026, and real disposable income is still having trouble with high housing costs.
That tension makes lenders more cautious and spending less, even if the Bank of Canada keeps lowering rates.
If gold’s rise continues, miners could keep making money, thanks to fund flows that have followed the story as bullion prices go up.
If supply discipline stays strong and capital spending on electrification grows, copper could still be a good thing for Canadian heavyweights.
These were some of the main points of focus when the Teck and Anglo merger kept base metals in the news.
In the first quarter, banks will have to deal with higher funding costs that don’t go down quickly, noninterest expenses that are harder to get rid of, and a cautious approach to new credit.
A faster-than-expected path to lower inflation that allows policy to return to normal sooner would make mortgages easier to pay and help housing activity sooner in 2026.
Clear proof that the Bank is still committed to its 2% inflation goal, even though growth is slowing, could also help keep rates stable.
On the other hand, a worse housing market, a surprise rise in unemployment, or oil prices falling below break-even levels for high-cost producers would probably cause the TSX to drop.
