A Comment -- General Comments From an Expert (A Commentary)

Another play for 2026. Lots of regulatory change going on in the US over the next little while. Trump administration wants to take away a lot of the regulation that came in during 2008 with Dodd-Frank. That move would free up a lot of opportunity from a capital perspective. So they could buy back more shares, increase dividends, and have more capital to expand.

We saw a bunch of M&A over the last year, which probably wouldn't have happened under the Biden administration. There are 4,000 banks in the US, it's ridiculous. Consolidating the banking industry would be very good. You could buy a regional bank index and do well over the next little while.

They usually trade at much higher multiples, something like 3x book value. You might actually get to those multiples in the next couple of years. 

When we experience challenging macro-economic conditions (recession, high inflation, geopolitical events) we buy quality businesses at lower prices which extends returns. He can't predict the next scenario. Since July, there's been a bifurcation of stocks, namely founder-run quality businesses which have been trading lower vs. AI stocks continued to trade much higher. He hasn't seen such a difference since 1999.

He's cautious for 2026. Earnings and capital markets have been very good in 2025, especially for Canada. The U.S. 10-year yield can't break 4%, which is a barrier to investment. Earnings growth always looks for the coming year. Fundamentals of rates and earnings are merely okay. There's so much uncertainty, starting with tariffs. Will we get a US Supreme Court judgement this or next month? What will happen with inflation? Will companies raise prices? The Fed will look at numbers and wait. What will happen to oil if there's a peace agreement? And to the US dollar? Interest rates have never been more important given so much debt. Suppose borrowing costs rise? Debt is important. We have a K-shapes economy: people with assets and people who don't own houses or stocks and are not participating in this economy. There's a growing discontent in the latter. He will sit and watch.

Carney is a lot better than the previous PM, so this is positive. However, Canadian banks aren't yielding 4-5% like a year ago, but 3%. Our economy is bleeding jobs, and there are problems with real estate. The jobs being created aren't replacing the ones lost. He'd rather get a higher yield from a utility or pipeline than a bank.

How much do you need for income? How much to protect your portfolio from calamity? Bonds don't pay yields like 4% and bonds also face more risk from inflation uncertainty. You buy gold to protect from inflation or geopolitical uncertainty. He holds 20% gold and 20% bonds in his portfolios. He wouldn't move his bonds into gold, but keep above-average gold for protection.

Prefers the device makers. He sold Novo Nordisk, but could buy it back. You can't buy the entire sector, but a part of it.

The Santa Claus Rally happens between Christmas and New Year's on average under 1%. It makes headlines, but doesn't mean much. Can the S&P hit 7,000? He's growing more concerned about valuations. AI tech stocks have been leaders, but have not made new highs this month, though markets have. As markets grow more expensive, it's tougher for markets to break out. A researcher, Jim Grant, noted that difference between cloud capacity and AI compute storage; he concluded that we will be grossly oversupplied in computer storage in a few years. Are we over-investing in AI? The tailwind is still buying dips, so markets will keep grinding higher. Washington needs to keep the market and US economy strong heading into the US midterm elections.

Yes and no. If trading takes up the vast majority of your day and your income, you lose the benefit of the tax shelter. This is what he's been told, so consult a tax expert.

Sometimes, yes, where the provider will take clients directly. Unfortunately, you need to pass the asset or income test and become accredited. This space is complex and some may need advice.

Forecasting is difficult. A year ago he predicted a volatile year, and he was correct. A year ago, the street predicted 6,496 for the S&P and we're now at 6,900; the bulls were around 7,000. S&P earnings growth was predicted at 12.1%, exactly what happened, but missed the PE which they predicted at 24.17x. He predicted AI and the US will lead in 2025. In reality, Canada is the world leader. It just surpassed emerging markets in terms of growth in 2025, followed by EM, Europe and the US in last place. So, he was wrong. The street (28 analysts) predicts the S&P to grow 9.2% to 7,464. The most bullish call is 8,100. Earnings growth will rise 13.4% given tax incentives, a new Fed chief and economic momentum.  Trump wants to keep the markets and economy strong heading into the midterms; the Republicans are struggling in polls now. Tech is largely pushing the US market higher. Unless people worry about AI In 2026, tech and stocks should grind higher in 2026. He expects momentum to continue in the first half of 2026, but the long end of the curve will have trouble rallying, making him concerned about the interest rate markets. The yield curve will steepen as short rates fall a little more. The street is pricing the Bank of Canada's next move to be a rate hike, which is insane. He expects a couple of rate cuts in the US and none in Canada, if the US economy stays strong. This could set us up for a fiscal cliff in 2027 and beyond, which would be really bad for markets which are exuberant. Gold will probably hit $5,000 before correcting big. When the liquidity bubble breaks, money will come out of Bitcoin, spec stocks and gold, and will rush into bonds.

In general, earnings estimates have been great. The market has been chewing through some rotation, and that's been going on a while. Money moving away a little bit from large-cap growth because there are some alternatives. 

Some money has been moving out of the US and back to international markets. Sectors like financials have been reasonably strong. So the market's been going through a balancing process. Looks decent going into 2026.

Pretty much every time he's been on during the course of this year, he's talked about how his firm has been reducing its tech weight because there are other things to do. Technology represents about 11% of his firm's assets, which is a pretty significant underweight. 

There are some great companies and great opportunities still there, but there's a lot of great risk/reward in other parts of the market. Relative price performance has been better in other sectors.

Long-term risk right now is inflation. Every government around the world is erring on the side of fiscal stimulus and fairly easy monetary policy. He wants to protect against that risk.

Certain sectors do better in that world. Financials are a classic -- low short-term rates and higher long-term rates give a nice net interest margin. Great inflation protection built in, power's in the hands of the lender. Materials and industrials are also good places to be. 

International stocks are relatively inexpensive and are heavy in those sectors -- as a result, they're outperforming the US market this year. A typical client account would be 15-10% international (ex-US), so that's Europe and Asia and Latin America. The MSCI All-World Ex-US Index has about 30% financials, a big materials weight, and a big industrials weight. Lots of great opportunities in those markets.

A stock where there's a very tight supply/demand relationship (there are buyers right under the surface) shouldn't be trading in a wide band. The wide band means that sellers have to push further, lower to get out. He likes to see companies trade in a very narrow, tight band.

Secondly, he wants to see the technical picture get better. Wants to see relative price improvement. See if a stock's trading better or worse than stocks in the S&P over the past year. Focus on areas of leadership in the market. There could be a ton of companies performing better. Sector might need a bit more momentum before you put $$ to work. You may pay a bit higher price, but you'll know that you're in a leadership part of the market.

He's going to pull the lens back, as he likes to look at things from a macro perspective. In 2020, we went from falling interest rates for 40 years to what is likely rising long-term interest rates for the next 25-30 years. That benefits banks in particular.

If you look at the XLF in the US, after going nowhere from 2008-2021, it finally made a new high. Beginning of a new long-term bull market that probably goes on 10-12 years. During that time, earnings go up and so do dividends. The multiple expands.

95% of global banks are trading above a rising 200-day MA. Don't be afraid of a bull market. These are dividend growth stocks, and when there's inflation a rising stream of income is pretty attractive to offset the rising cost of living.