Bank shares now decide where the whole index goes, and that cuts both ways
Canada's financial sector now accounts for 37 percent of the S&P/TSX Composite, its highest weighting in eight years, a concentration that leaves anyone holding the broad index more exposed to a single group of stocks than the label "diversified" implies.
That share has climbed quickly.
As recently as March, financials made up 31 percent of the index, according to LSEG data cited by Reuters.
Bank shares have driven the increase: since February, the TSX financials group has gained 22 percent, while energy has added 7 percent and materials, which includes miners, has dropped 25 percent, Reuters reported.
Financial stocks pulled ahead as gold prices eased and hopes of a Middle East peace deal capped a spike in oil.
The rotation has helped the TSX outperform the S&P 500 in 2025 and again in 2026, as investors sought an alternative to heavily tech-weighted US indexes.
Canada's Big Six banks, Royal Bank of Canada, TD Bank, Bank of Montreal, Bank of Nova Scotia, CIBC, and National Bank of Canada, control much of that weight after several posted consecutive quarters of double-digit earnings growth.
That run has pushed valuations to levels some managers now question.
The five largest Canadian banks trade at an average of 15 times forward earnings, against 12 times for the top five US banks, and sit at their most expensive relative to those peers since 2010, according to Reuters.
"That is an area of concern for me and it's been for quite some time," senior portfolio manager Michael Dehal of Dehal Investment Partners at Raymond James told Reuters.
If earnings fall short, he warned, the index itself is exposed: "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."
Not everyone shares the caution.
In July, Veritas Investment Research analyst Shalabh Garg lifted his stance on the sector to market-weight from underweight, urging investors to at least match the Big Six's index weighting.
The banks can "sustain current premium valuations" despite an uncertain macro backdrop, Garg wrote, since they are "largely immune" to AI disruption, benefit from steady financial markets and are unlikely to face a systemic credit event soon, as per Reuters.
The banks have leaned on capital markets and wealth management to diversify revenue, and market volatility has lifted trading income while investment-banking fees have picked up, Reuters reported.
Retail books have held up as savings rise and mortgage payments stay current, and lenders retain large provisions built against loan losses that have yet to materialize, which could feed earnings if released.
According to Kingwest & Co managing director Anthony Visano, a historical pattern favours the group: when financials have carried a similar index weight, they have returned an average 20.5 percent over the following 12 months, against 14.5 percent for the TSX.
"They're proving their competitive advantages at every segment, and now you're seeing the payback," Visano told Reuters.
The thesis faces an early test this month.
Scotiabank and BMO are scheduled to report fiscal third-quarter results on August 25, with RBC, TD and CIBC following later that week, according to the banks' investor disclosures.
Ahead of the season, BofA Securities told clients on August 4 that it expects the group to beat estimates, noting the banks entered the quarter up about 9 percent since before their second-quarter results and trading at premium valuations.
The stretch already shows in the tape: RBC, the largest lender, has gained roughly 26 percent this year, and the average analyst price target compiled by MarketScreener sits below its current level near $294.
