Canada’s financial sector hits 8-year high on benchmark index

Canada’s financial sector now represents 37% of the TSX benchmark stock index, reaching its highest level in eight years as investors favor bank shares over energy and materials stocks.

The concentration in financial stocks reduces diversification benefits for investors holding broad index positions and increases exposure to potential declines in the banking sector. The TSX has outperformed the S&P 500 in 2025 and this year partly by offering an alternative to heavily tech-weighted U.S. indexes.

Canada’s six major banks—Royal Bank of Canada (TSX:RY), TD Bank (TSX:TD), Bank of Montreal (TSX:BMO), Bank of Nova Scotia (TSX:BNS), CIBC (TSX:CM) and National Bank of Canada (TSX:NA)—dominate the country’s financial market. These lenders have reported multiple quarters of double-digit earnings growth and now trade near multi-decade high valuations, raising questions about whether earnings can meet elevated expectations.

"That is an area of concern for me and it’s been for quite some time," said Michael Dehal, senior portfolio manager at Dehal Investment Partners at Raymond James. "If the earnings cannot live up to the multiple, you are going to see the price decline and that’s going to weigh on the TSX."

Financial stocks have outpaced energy and materials sectors since the U.S. attacked Iran in February, as gold prices fell and peace deal prospects limited oil price increases. Since February, financial stocks have gained 22%, while energy stocks rose 7% and materials stocks dropped 25%, though mining shares have recovered some losses recently.