Canada’s financial sector has expanded to account for 37% of the TSX benchmark index, its highest representation in eight years, as market participants continue to prefer bank shares relative to energy and materials firms. The tilt toward financials has contributed to the TSX outpacing the S&P 500 in 2025 and this year by offering an alternative to U.S. indexes that remain heavily weighted toward technology names.
The country’s financial landscape remains concentrated around six large lenders - 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) - which together dominate the sector. These institutions have reported multiple quarters of double-digit earnings growth and now trade near multi-decade high valuations, a combination that has prompted questions about whether future earnings can justify current share prices.
"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."
Market action since February illustrates the relative strength of financial stocks. In the period following the U.S. attack on Iran in February, financial stocks have increased by 22%, energy stocks have advanced 7% and materials stocks have fallen 25%. The article notes that mining shares have recovered some of their earlier losses recently.
The growing concentration of financials in the TSX reduces the diversification benefits for investors who hold broad index positions. That higher weighting means that broad Canadian equity exposures are more sensitive to developments affecting the banking sector, including earnings performance and shifts in valuation sentiment.
Market context and implications
- The TSX’s relative outperformance in 2025 and into this year has been driven in part by its heavier exposure to financial stocks versus U.S. indexes’ tilt toward technology.
- Major Canadian banks have delivered several quarters of strong earnings growth and currently trade at valuations near multi-decade highs.
- The performance gap across sectors since February has favored financials over energy and materials, although mining stocks have shown signs of partial recovery.
Bottom line
The current market configuration offers strong returns tied to financial-sector strength, but it also concentrates risk. Investors with broad TSX exposure should be aware that a reversal in bank earnings or a re-rating of valuations could have outsized effects on index performance.