EQUITIES COMMENT – “FOCUS ON ENERGY”

Global equity markets started out the quarter strong, buoyed by expectations for double-digit earnings growth in 2026 and 2027. However, the upward trend was derailed by the U.S/Israel/Iran war. The critical developments for stocks were the virtual closure of the Strait of Hormuz and the assault on neighbours' oil infrastructure, resulting in a 78% jump in oil for the quarter.

Depending on how long the price remains elevated, economic growth could slow, and inflation could increase. Including dividends, the TSX ended with a gain of 3.9% for the quarter due to a large weighting (18%) in Energy, while the S&P 500 was down 2.6% in Canadian dollar terms and the MSCI World was down 2.5%.

Investors often move funds to perceived "safe havens" like gold during a time of conflict. Gold posted a gain for the quarter of 8%. A two-week ceasefire agreement has been reached, with expectations that more tankers will be able to move through the Strait of Hormuz, resulting in a sharp decline in oil and an uptick in gold. Energy posted the strongest gains in both Canada and the U.S., while Utilities, Materials, and Consumer Staples had solid returns. Technology was down for both the TSX and S&P 500 as worries about the impact of AI on future revenues and profit margins pressured software stocks, and huge capital spending on data centres raised concerns about the ultimate payoff from AI.

The graph below shows the performance of the TSX Energy sector, the TSX Composite and the North American oil price (WTI-West Texas Intermediate) from October 2019 to April 2026. Oil plummeted during the pandemic and recovered through 2022. It then traded in a narrow range until the U.S./Israel/Iran war broke out. Since 2022, the Energy sector has been rising despite limited movement in the oil price and has generated a total return greater than the TSX Composite since early 2022.

What have been some of the factors supporting the gains in Energy if not the oil price?

1. Increasing financial discipline-companies have been using cash flow to pay down debt, increase dividends and buy back shares.

2. Improving efficiency so more profits can be generated from existing operations.

3. Until recently, Energy stocks had among the lowest valuations of TSX Composite stocks.

4. Growing production by implementing advanced technologies, capturing efficiencies and making selective acquisitions.

5. Pipeline access has improved with the construction of the TransMountain and Coastal GasLink Pipelines. This has allowed companies to expand production and receive better pricing.

6. In 2025, Mark Carney began to promote the idea of making Canada a clean energy superpower. Reducing the timeline and obstacles to expanding production and accessing markets outside of the U.S. could give the sector a tremendous growth opportunity.

7. Recent geopolitical events have brought energy security to the forefront yet again. Here, Canada stands out as a responsible producer with ample reserves.

   
   

Forecasters are still expecting at least two more years of double-digit earnings growth. Should earnings meet expectations, returns of approximately 10%-15%, including dividends, are possible for the TSX and S&P 500, assuming p/e multiples remain stable. Economic growth could disappoint if oil remains higher for longer, and Canada is also dealing with a more negative trade environment. Higher bond yields due to inflation worries have already put modest downward pressure on p/e multiples.

Commodity prices weaken - TSX earnings growth would be reduced if there was a significant correction in gold. Demand for gold from central bankers is waning, and investors are now driving gold prices, so at any sign of a downturn in gold, large-scale selling could occur. There are concerns about AI and how it will affect profitability for the Tech sector, particularly for software companies and firms making very large capital investments. For now, no changes are being made to the year-end forecasts for the TSX (35,500) or the S&P (7,800), although the war in the Middle East has raised the risk of disappointing economic growth, increased inflation and higher bond yields due to the rise in the price of oil.