Canadian bank stocks are caught in the middle of tariff uncertainty, which is giving investors a lot to contemplate as Donald Trump waves his magic Sharpie. I’m reporter David Berman, filling in for Scott Barlow, and today we’re looking at the tariff future that bank stocks are pricing in – and what are the downside risks facing the sector. We’ll also take a look at a popular investor sentiment survey that has recently fallen into deep bearish territory, and what that means. And, let me tell you about how I got hooked on classical music.
The Bank of Montreal and TD Bank towers are photographed on April 21 2020.Fred Lum/The Globe and Mail
Financials
Bank stocks are down. They could be down a whole lot more.
Canada’s big bank stocks have held up surprisingly well throughout the on-again off-again tariff threats emanating from U.S. President Donald Trump. Does that mean the sector is immune to his bluster – or are investors simply ignoring very real economic risks?
It’s a hot topic, given the popularity of bank stocks and their steady dividends.
Two Bay Street analysts – Darko Mihelic at RBC Dominion Securities and Paul Holden at CIBC Capital Markets – have delved into what equity valuations are suggesting about tariffs.
Their conclusions might not come as good news to investors: Bank stocks, they believe, are reflecting optimism about whether tariffs become a reality and thwack the Canadian economy.
That means the downside risks are substantial should Mr. Trump’s black Sharpie swing into action. How much downside? Try 16 per cent to 18 per cent, depending on which analyst you want to side with.
Mr. Mihelic noted that Canadian Imperial Bank of Commerce (CM-T) and Bank of Nova Scotia (BNS-T) are more exposed to economic stress than their peers, given their relatively high loan exposure to Canada and, in the case of Scotiabank, Mexico. The stocks are down by an average of 10 per cent this year, lagging the sector.
On the other hand, National Bank of Canada (NA-T) and Bank of Montreal (BMO-T) are less risky. While National Bank isn’t lighting up anyone’s portfolio, BMO is up slightly this year and way ahead of peers.
On average, though, Mr. Mihelic doesn’t believe that valuations – using the oil price collapse of 2016 as a comparison – are reflecting a bad-case scenario for tariffs.
“We believe bank stocks in our coverage could face another 9 per cent to as much as 16 per cent median price downside from current levels if tariff threats materialize and economic conditions continue to weaken in the second half of 2025,” Mr. Mihelic said in a note.
Mr. Holden constructed an upside-downside scenario for bank stocks, depending on whether tariffs actually emerge. (And, yes, the future is still baffling: Bloomberg News and the Wall Street Journal reported this weekend that the White House may omit some sector-specific tariffs that are set to begin on April 2, which sent the S&P 500 rallying.)
“With bank stocks down 6 per cent on average since Trump announced that tariffs on Canada would be enacted, we think bank valuations are fully reflecting temporary and targeted tariffs,” Mr. Holden said in a note on Friday.
The key words here are “temporary” and “targeted.” Broad and lingering tariffs, the analyst estimates, could lead to an 18 per cent slide in bank stock prices.
Okay, there’s an upside here, too: The no-tariff scenario (hey, it could happen!) could launch a 7 per cent rally. Still, weigh the small upside against the severe downside, and Mr. Holden concludes that the risk-to-reward potential isn’t great.
“We will not attempt to place probabilities on each scenario, but clearly there is more downside risk to a negative outcome than upside from a positive outcome,” he said.
DNY59/iStockPhoto / Getty Images
Market sentiment
Small investors fear stocks. Is that a good thing?
The mood among small investors is unequivocally ugly right now. The question is, what does this mood mean for the rest of us?
The American Association of Individual Investors polls its members each week on their short-term outlook for the S&P 500. The AAII then tabulates the results into three categories – bullish, bearish and neutral.
Over the past four weeks, this widely quoted sentiment survey has delivered a clear message: Small investors are deeply pessimistic about stocks.
Last week’s survey showed that just 21.6 per cent of investors were feeling bullish. While that was up – a little – from 19.1 per cent in the previous week, the reading remains well below the long-term average of 37.5 per cent. In July 2024, 52.7 per cent of respondents felt bullish.
At the same time, bearish sentiment is sitting at 58.1 per cent as of last week. That is well above the historical average of 31 per cent.
Some professional investors are delighted by a poor opinion of stocks. If share prices are reflecting low expectations, stocks can rally if better news prevails. Indeed, the popular opinion of the AAII sentiment survey is that it is a contrarian indicator: Bearish sentiment can be a good time to buy because stocks are cheap.
The problem now? Though lofty valuations have subsided, stocks still aren’t cheap. And the economic uncertainty – I’ll remind you of tariffs and their potential impact – continues to weigh on consumer sentiment.
As Sal Guatieri, senior economist at Bank of Montreal, put it last week in a note: “Apart from the pandemic, U.S. economic policy uncertainty has never been higher in the past four decades.”
Maybe small investors are onto something.
Diversions
I’ve embraced classical music in my fifties. What took me so long?
I’ve been getting into classical music over the past couple of years, after inheriting my father’s modest collection of cds and then bolting on my own additions.
As a Zephead, the journey into Bach, Beethoven, Brahms and Mozart can be a little overwhelming. But I’ve found the perfect online guidance: The Ultimate Classical Music Guide by Dave Hurwitz, a YouTuber with a remarkably accessible approach and literally thousands of videos.
I now own several hundred classical music cds, including 49 Beethoven symphonies (thanks, Dave) and – can this be right? – seven versions of Mendelssohn’s violin concerto op. 64. I just hope I live long enough to listen to everything.
The essentials
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Globe Investor highlights
Ian McGugan suggests three options for investors looking to escape Trump’s turbulence
Ken Fisher still sees stocks having a good year even amid all the tariff terror
Analysts are turning more cautious on U.S. corporate earnings for the first quarter of this year
Invest $50,000? In this economy? John Heinzl says that’s actually not a bad idea
What’s up next
On Tuesday, we’ll get a look at an economic reading that is gaining importance as U.S. tariffs and White House policy mayhem weigh on sentiment: Economists expect that the Conference Board Consumer Confidence Index for March will retreat to 94 from 98.3 in February. As you may recall, February’s reading marked an unexpectedly sharp drop from January.
Also, keep an eye on U.S. new home sales – also due on Tuesday – for signs of fatigue among homebuyers now contemplating stubbornly high mortgage rates and economic uncertainty.
Oh, and the AAII’s latest investor sentiment survey, based on Wednesday data, is out on Thursday.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)
TFSA Investors, we want to hear from you
Last year, we launched our new TFSA Trouncers series, where we profiled Canadian investors who’ve accomplished incredible feats with their tax-free savings accounts. We’re still on the lookout to find more Canadians who wish to share their experiences – especially those who’ve had tremendous success or failures to tell us about. To participate, drop us an e-mail at dakeith@globeandmail.com.