CIO explains the outlook for North American financials
North American financials are, broadly speaking, sitting at a positive point in the interest rate cycle. Canadian banks have benefitted from a cutting cycle that, it appears, came to its end last year. The United States appears in the midst of its cutting cycle, and the likelihood is that when Fed Chair Jerome Powell leaves at the end of his term in February he will be replaced by a more dovish individual. In a sea of broad volatility, the cyclical nature of this sector and its current point in the cycle may make some investors take notice. The question, though, is how to play the dynamics between the US and Canada.
For James Learmonth, the answer is diversification. The Co-CIO and Portfolio Manager at Harvest ETFs explains that while the two countries may be at different points in their cutting cycles, there is a degree of underlying positivity that stems from improved interest margins and fiscal stimulus on both sides of the border. He argues that advisors don’t need to see allocations to US or Canadian banks as mutually exclusive and can, instead, provide complementary exposures in a broadening market.
“When comparing Canadian US banks, it's generally for Canadian investors, not a one or the other, US banks can be a great compliment for a Canadian banks portfolio,” Learmonth says. “Canada's economy is a little bit slower that what the U.S. has and we're dealing with the extra pressures of tariffs. But, for our big six banks they’re still a well-defended oligopoly, so that's great for that sector as a whole.”
The big six Canadian banks also come with some exposure to a US market and US economy that looks strong for financials. Learmonth explains that the stimulus for US banks in the One Big Beautiful Bill Act, such as the automatic depreciation of capital spending, could be good for banks lending to mid-sized companies. As well, the United States M&A market appears to be heating up, another tailwind for US large diversified banks like Citigroup, Bank of America, J.P. Morgan, and others.
While some advisors and investors may just look at how much further the US can cut rates from its current point as a potential indicator for outperformance this year, Learmonth notes that there are still nuances. Because the US is a higher growth economy, the risk of inflation may keep even a more dovish Fed chair from cutting too much further. Canadian banks’ US exposure is also a form of insulation from any cross-border policy divergence.
The issue of Fed independence is a risk factor for investors to consider when looking at US financials, but a more dovish Fed doing exactly what President Trump wants would likely result in an even deeper steepening of the yield curve, which would actually be good for bank margins in isolation. Weakening confidence in the bond market may prove a greater risk for investors, but that would also likely impact Canadian banks as well.
For all their stability and cyclical upside at this point, both US and Canadian banks are not completely protected against the geopolitical risks currently spooking markets. Their exposure, Learmonth explains, comes through the uncertainty that can plague business owners at moments like these. Just as we saw in the first half of 2025, when businesses don’t know how things will change they tend not to borrow, which can generally impact bank outlooks. It was the achievement of stability on US tariff policy, Learmonth says, that drove performance in US banks late last year. This latest round of uncertainty could spell another risk for the sector.
For Canadian advisors looking to play the financials space, therefore, Learmonth believes the promise lies in diversification of allocation and of strategy. He notes that his firm has just launched a new Canadian financials ETF tracking the big six banks with an even split between covered call options, covered put options, and long equity exposure. He sees this kind of allocation as potentially useful for its capacity to maximize income and offset volatility through options. Allocations like that, he argues, give advisors a way to play the space with an optimistic view of where things are and the acknowledgement that things could change.
“It doesn't hurt to take a diversified, balanced approach to banking exposure. I think both sectors can actually continue to do well, assuming we avoid the worst case scenario here,” Learmonth says. “That's what we're expecting this year. For all the news and headlines that are out there, we are still bullish, on both markets, so I think it becomes more about risk management and diversification.”
