Barlow’s Research Roundup: A BofA analyst’s top picks, earnings preview for Canadian bank stocks

BofA remains constructive on Canadian banks, saying the group can earn into normalized valuations on 13.1% average EPS growth in FY26-28, with buybacks contributing about a quarter of forecast EPS growth. Top ideas into 2Q results are National Bank and TD, supported by capital markets tailwinds, excess capital, and potential efficiency gains, though near-term headwinds include higher PCLs, softer loan growth, and competitive deposit pricing. Scotiabank is also turning more constructive on industrial REITs, while RBC highlights a volatile but fundamentally tight copper market amid supply disruptions and Peru/Chile political risks.

Analysis

The cleanest expression of this tape is not “buy the banks” but “own the balance-sheet beneficiaries of a late-cycle reflation while fading rate-sensitive weak links.” In Canadian financials, the market is increasingly paying for capital-return optionality and fee mix quality, so the incremental upside is more likely to come from authorization size, buyback cadence, and operating leverage than from loan growth. That creates a favorable setup for the highest-capitalized names with the most visible efficiency levers, while sub-scale or more domestically levered peers face a higher bar to justify premium multiples.

The second-order effect is that better bank earnings can be a subtle leading indicator for Canadian risk appetite more broadly: if capital markets and wealth revenue stay firm while domestic credit remains manageable, equity investors may rotate from defensive cash-rich balance sheets into cyclicals and real assets. But the trade is fragile if PCLs start to reprice faster than expected or if funding competition compresses deposit beta benefits; that would hit the market’s willingness to pay for quality-duration in banks. The real risk horizon is 1-2 quarters, not 1-2 years: near-term results can re-rate these names, but a sharp macro downdraft would quickly cap the multiple expansion.

Industrial REITs look more interesting as a mean-reversion trade than a breakout story. The market has already discounted a prolonged normalization, so the upside likely comes from any evidence that absorption is re-accelerating into the back half of the year, which would support NOI growth and revive pricing power without needing a heroic macro call. The contrarian angle is that this setup can work even if transaction markets remain muted: landlords with stronger tenant rosters and more embedded lease mark-to-market can widen the gap versus weaker peers before fundamentals are fully visible in reported numbers.

Key Decisions for Investors

• Long TD vs. short a weaker Canadian bank basket for the next 1-2 earnings cycles: TD has the cleaner capital-return and efficiency narrative, while the short leg should be a domestically exposed name with less fee mix and tighter capital flexibility. Target a 5-8% relative outperformance if buybacks or capital deployment accelerate.
• Buy NA on pullbacks with a 3-6 month horizon: this is the higher-conviction quality compounder if business-mix improvements and capital synergies translate into visible EPS upgrades. Risk/reward is attractive so long as credit remains orderly; trim if PCL commentary turns materially worse.
• Go long DIR / GRT against a short in a lower-quality industrial REIT or office-adjacent real estate proxy for a 6-12 month normalization trade. The pair should benefit from any H2 stabilization in vacancy/absorption trends, with a potential 10-15% spread move if leasing momentum improves.
• Use call spreads on a diversified copper miner basket (FCX/CU-equivalent exposure via listed proxies; in this article, FQV, HBM, FM-linked names) for a 2-4 month tactical trade. Keep size modest: upside can be sharp on supply headlines, but policy reversal or inventory rebuild can unwind the move quickly.
• Avoid chasing the bank rally at current highs; if entering, stage purchases into post-earnings volatility and hedge with index downside. The market is paying for perfection, so the best entry is usually on any 3-5% drawdown tied to normalizing macro noise rather than on momentum.