Desjardins’ chief economist on why the TSX is set to outperform U.S. stocks in this ‘year of chaos’

The TSX has rebounded more than 1,000 points this month, but Desjardins’ Jimmy Jean says the rally may be premature if elevated oil prices persist and squeeze corporate profitability. He remains cautiously optimistic on 2026 equity returns, citing upside in Canadian materials, energy, utilities and financials, while warning that AI-driven gains may be overextended and that investors should hedge inflation risk with commodities, real assets and real return bonds.

Analysis

The market is still pricing a fast normalization path that requires both energy dislocation and earnings resilience to stay benign at the same time. That is a fragile combination: if input costs remain elevated for several quarters, the first-order hit is margins, but the second-order hit is guidance credibility — especially for cyclicals and software businesses that need cheap power and stable capex assumptions. In that setup, the rally’s biggest risk is not an immediate macro recession; it is a sequence of small earnings resets that compress multiples before analysts fully mark down estimates.

The more interesting implication is that this is becoming a physical-capital cycle rather than a pure duration/AI-duration trade. The winners are not “AI” in the abstract, but businesses that sit on scarce inputs: electricity, transmission, grid equipment, minerals, and balance-sheet capacity to finance buildout. That shifts relative performance away from asset-light software and toward upstream enablers; if power remains a bottleneck, the market will start rewarding reliability and low-cost energy access over narrative exposure.

Canada screens as a structural beneficiary because it offers a mix of power, commodities, and regulated cash flows that can absorb inflation better than long-duration growth sectors. The underappreciated risk is that this advantage only matters if capital actually follows; if investors crowd into the same few Canadian “safe” exposures, the trade becomes crowded quickly and returns will likely come from stock selection rather than index beta. The contrarian take is that the current optimism around rapid AI monetization is still too aggressive: productivity gains usually show up after adoption pain, not before, so the near-term winners are likely the picks-and-shovels names, not the application-layer beneficiaries.

Key Decisions for Investors

• Long H/REIT-free Canadian power and grid beneficiaries vs U.S. software: buy Canadian utilities/grid names on pullbacks and short a basket of software names with heavy AI displacement risk over 3-6 months; objective is to capture the market’s rotation toward power scarcity and away from duration-sensitive multiples.
• Initiate a pair trade: long Canadian materials/energy proxies (e.g., resource-heavy TSX exposure) vs short QQQ or a software sub-index for 1-2 quarters; risk/reward favors the leg tied to real assets if inflation stays sticky and AI monetization disappoints.
• Use options to express downside skew in crowded AI winners: buy 3-6 month put spreads on AAPL or broad U.S. tech exposure after any rally extension; the thesis is not an AI crash, but a valuation reset driven by slower-than-expected productivity payoffs.
• Add inflation hedges tactically via commodities-linked exposure and inflation-linked bonds for the next 6-12 months; this is the cleaner hedge if energy volatility persists and equity earnings revisions turn negative.
• If owning Canada beta, prefer quality balance sheets and regulated cash flows over levered cyclicals; the market may reward the theme, but the best risk-adjusted returns should come from names that can self-fund capex without refinancing risk.