Investors are expecting the

S&P/TSX composite index

to deliver more muted returns of five per cent to nearly 10 per cent in 2026 after two consecutive years of double-digit gains.

With one more trading day left in the year, the index was on the verge of delivering a 30 per cent return in 2025, its best yearly return since 2009.

Brent Joyce, chief investment strategist at BMO Private Wealth, said BMO predicts the S&P/TSX composite to end 2026 at 34,000, from about 31,960 on Tuesday, and is recommending investors be overweight on equities to take advantage of government spending, as well as defence spending, tax cuts in the United States and China opening its coffers.

But he said investors will need to stay focused on earnings.

“Earnings are what matters because nothing is cheap,” Joyce said, adding that the current macroeconomic landscape is configured to support businesses.

For example, the

Bank of Canada

has cut

interest rates

to 2.25 per cent, a level he called “quite accommodative,” though it sits at the bottom of the central bank’s neutral range of 2.25 per cent to 3.25 per cent.

Meanwhile, billions of dollars in stimulus spending are coming from the federal government to get infrastructure projects off the ground and companies investing again.

“That’s a good backdrop for earnings to deliver,” he said.

Neil Linsdell, vice-president and head of investment strategy at Raymond James Investment Counsel Ltd., also expects the S&P/TSX composite to end 2026 at 34,000.

He said in a report that the breadth of stocks trading above their 50-day moving average has increased and “we expect this momentum to carry into 2026.”

His forecast for the S&P/TSX composite is based on three assumptions: the Bank of Canada could cut interest rates one more time, possibly early in the new year, to take rates to two per cent and into stimulative territory; the successful renewal of the Canada-United States-Mexico Agreement (

CUSMA

); and the “rollout” of federal spending by Ottawa.

“We expect Canadian equities to benefit ahead of the broader economy, given the investment-heavy nature of budget 2025,” Linsdell said.

But some investors said those gains might be harder to nail down since bank and

gold stocks

are trading at higher premiums.

“To be really bullish on the TSX in the next year, you have to believe, one, either gold is going to continue to run, which I think is a challenge,” Craig Basinger, chief market strategist at Purpose Investments Inc., said. “And then financials would have to perform.”

Purpose hasn’t made a call on where the S&P/TSX composite will land in 2026, but Basinger said the year ahead appears challenging.

“The TSX probably has a higher risk of a pullback than some of the other markets,” he said. “Because we’re now at the point where the valuations aren’t cheap anymore. We were much more positive on Canada at the beginning of this year than we are now.”

Basinger said the S&P/TSX composite is trading at 16.5 times forward earnings, which he called pretty stretched.

He also said the market’s gains over the past year have been concentrated in materials and financials. He estimated that approximately two-thirds of the S&P/TSX composite’s gains came from those two sectors, with gold accounting for around 11 per cent of the gain in materials.

“Gold is a tricky one because it can give and take away just as quickly,” Basinger said.

The price of gold has risen 64 per cent this year, as of Dec. 30. All of the top 10 gainers on the S&P/TSX composite this year were stocks in materials, except

Celestica Inc.

But the financials sector, which includes the

Big Six banks

, still accounts for 32 per cent of the index.

“So, where the banks go, often the TSX goes,” Basinger said.

He said the banks are already “really expensive” and carrying valuations that are well above their longer-term averages.

He also said investors would have to have a pretty optimistic take on the Canadian economy for the banks to continue supporting the market.

“Gold doesn’t care what the Canadian economy is doing. Energy doesn’t care, but the banks do,” he said. “The question then becomes, what else could lift the TSX?”

But Joyce said investors should “not look for a repeat of the returns we’ve seen in gold and gold stocks in 2025.”

He said the Big Six have more to give and that

Royal Bank of Canada

,

Toronto-Dominion Bank

and

Bank of Montreal

are huge companies whose operations touch many parts of the Canadian economy, but are also global in scope. The same goes for insurers such as

Sun Life Financial Inc.

and

Great-West Lifeco Inc.

BMO also pegged the energy sector as a possible “dark horse” in 2026 on expectations that

oil prices

will remain stable despite a global glut as demand improves in China, Europe and North America.

He said adding US$10 to US$15 to the price of a barrel of oil could make a big difference to energy companies, which have been improving profit margins.

“Should earnings deliver, we are going to be fine, and stock markets will continue to move higher,” Joyce said. “If earnings disappoint, then we’ve got an entirely different story, because our expectations are high.”

Bank of Nova Scotia is predicting the S&P/TSX composite to end 2026 at 35,000, while Canadian Imperial Bank of Commerce expects the index to hit 35,200. Capital Economics Ltd. is calling for the S&P/TSX composite to close next year at 33,500.

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• Email: gmvsuhanic@postmedia.com