The sky over the Kawarthas this week has been the colour of a bruise. Smoke from the fires burning across northern Ontario and Quebec settled over the lakes, turning the sun a hard orange and leaving that acrid campfire smell in everything. For many it has been far worse than an inconvenience: Toronto spent a day this week with the dirtiest air of any major city on earth, First Nations communities in the northwest like Armstrong and Whitesand have been under evacuation orders, and anyone with uncooperative lungs was told simply to stay indoors.

It's a strange thing to hold in your head alongside the stock market, because up where bank shares are trading, the air has the opposite problem. It isn't thick — it's thin. North American banks have climbed to an altitude where there's barely enough oxygen to support them, and still they go up. Two kinds of unbreathable air: one you can smell, and one you only notice when a stock priced for perfection misses by a penny. This week is about the second kind — though we'll come back to the first before we're done.

The scoreboard

Let's start where I like to start, with the numbers on the board rather than the story we tell about them. Through mid-July, the S&P/TSX Composite's financials group is up roughly 25% on the year and the narrower banking sub-group is up 33% since the start of the year. That's after the sector jumped about 40% in 2025, which itself capped one of the best years the Canadian market has ever printed. While energy has been the leading major group for the TSX this year, banks have been better. South of the border, the story rhymes but the engine is different. U.S. banks spent the first half riding a wave of dealmaking and trading, and this week they cashed the cheque. Even with the advances this week, the S&P500 banking subgroup is up only 10% on the year.

The point for now is simple. Coming into 2026, plenty of us expected banks to be a decent, boring, dividend-paying place to hide. Instead, they've been the market's sports car. Ally and I have had more than a few client conversations lately that begin with some version of “I can't believe what my bank stock has done given the mess I’m seeing in the world” — and that, historically, is a phrase worth paying attention to.

Vertical, in a lacklustre economy

Here's what makes the Canadian move genuinely puzzling. It has happened against an economic backdrop that is, to put it kindly, uninspiring. The Bank of Canada held its policy rate at 2.25% on Wednesday, roughly as expected, and leaned into a message that growth should firm up in the second half while inflation cools from here. Fair enough. But look under the hood. Inflation was still above 3% in May. Unemployment is sitting near 6.5%. This is not an economy sprinting; it's an economy jogging, and not especially briskly. So why are the banks — whose fortunes are supposed to track the real economy — behaving like AI darlings? A few reasons, and they're worth pulling apart because not all of them are equally durable.

First, for two years the bear case on Canadian banks was the mortgage-renewal cliff — all those ultra-cheap 2020 and 2021 mortgages resetting at far higher rates, dragging borrowers into arrears. It largely didn't happen. Banks stretched amortizations, households kept their incomes, some accumulated equity, and the feared surge in credit losses turned into a manageable trickle. Provisions have actually been coming down. When the scariest chapter of your bear thesis quietly gets deleted, the stock re-rates.

Second, when the Big Six reported fiscal Q2 results in late May, all six topped estimates and five raised their dividends. The largest of the group saw profit climb 25% to $5.5 billion, powered by a surge in capital-markets earnings and lighter loan-loss provisions. That's the template across the group: resilient domestic banking, plus a capital-markets tailwind nobody fully priced in.

Third, even though the Bank of Canada’s tone has turned hawkish relative to the end of last year, a 2.25% policy rate is stimulative enough to ease funding pressures and support loan demand, while the recession that would actually hurt credit hasn't materialized. That's the sweet spot for a lender — low enough rates to keep the machine turning, but no crash to clog it.

Fourth, when U.S. banks blew the doors off this week, Canadian financials caught the updraft. Wednesday's TSX record was explicitly a financials story, and the tape here increasingly takes its cues from what the American banks are reporting. On top of that, we still see strong foreign inflows into Canadian equities and those flows are large relative to the size of our market. Add it up and a rally makes sense. What's harder to defend is the size of it.

Records? Look at the multiple, not the tape

To be sure, we have seen momentum like this before, though it tends to happen more in recovery years. The genuinely unprecedented number is what investors are now paying for these earnings. Historically, Canada's largest banks have traded around 11 times earnings. Today the group is in the range of 14-18 times expected 2027 earnings — a level the market has rarely, if ever, sustained.

These are not the multiples of sleepy, rate-sensitive lenders. These are growth multiples, pinned on businesses whose earnings are, at their core, cyclical. That's the part that should give us pause. Valuations are the one variable that reliably mean-reverts. A bank can grow into a rich multiple if the earnings power is structural. It cannot be if the earnings power is on loan from a hot capital-markets cycle. Which brings us across the border.

The American engine: trading and IPOs

If Canadian banks went vertical on a story, U.S. banks went vertical on a quarter — and what a quarter it was. JPMorgan kicked things off with record net income of $21.2 billion. Strip out a one-time gain on its Visa stake and core earnings still landed around $6.14 a share, comfortably ahead of the roughly $5.80 the Street expected. Revenue rose 27% to $58 billion. The drivers: equity-trading revenue up a staggering 86%, and investment-banking fees up sharply as deals closed.

Then it got louder. Goldman Sachs posted the best quarter in its history — earnings of $20.98 a share, nearly double a year ago, on revenue up 39%. Equities revenue set a record, up 72%; fixed-income trading rose 32%; and investment-banking fees jumped 55%, with record debt underwriting. A day later Morgan Stanley matched the theme with its own record — revenue up 27%, profit up 58%, equity trading up 69% — and, tellingly for our business, a record $8.9 billion in wealth-management revenue and $148 billion of net new client assets, just over half of it flowing in from employees of newly public companies cashing in. Think SpaceX. The largest IPO on record didn't just generate underwriting fees for the banks that ran it. It generated soft-dollar trading business from the funds that wanted allocations, and then it generated wealth-management inflows as suddenly-liquid employees parked their windfalls. One deal, rippling through three separate revenue lines. When people ask what “capital markets strength” actually means in a quarter like this, that's the anatomy of it.

The warnings inside the good news

Still, the tone was not uniformly positive with respect to this week’s US bank results. There were points of concern — and the most striking ones came from the executives themselves. Jamie Dimon, celebrating the best quarter JPMorgan has ever produced, told analysts it's “close to as good as it gets,” and admitted no one knows how long it lasts. In his written remarks he went further, describing risk as shifting quietly beneath the surface — geopolitics, sticky inflation, swollen government deficits — even as the surface looks placid. His own CFO was just as candid about the trading haul. Pressed on that 86% jump in equities, Jeremy Barnum said plainly that it's hard to imagine the quarter being repeated, attributing the surge to a specific cocktail — a handful of mega-IPOs, index rebalancing, and unusual dynamics in Korean equities.

Management also conceded that some of the investment-banking strength was deal flow pulled forward from later in the year. And the market itself flashed a caution light. Despite the record, JPMorgan shares actually slipped on the day, because the bank nudged its 2026 expense guidance higher. When a stock can't rally on its best-ever quarter, that tells you how much good news was already in the price. 

Here's the uncomfortable symmetry. The very thing powering the earnings on both sides of the border — volatile trading and advisory revenue — is exactly the line item that rating agencies and regulators have long warned banks not to lean on, precisely because it evaporates when markets go quiet. Canadian and American banks are being handed premium, structural-growth valuations for earnings that their own leaders are describing as, at least in part, a moment in time.

The rotation that lifted them

There's one more force worth naming, because it explains the flows rather than the fundamentals: the great rotation out of Big Tech. For most of the last three years the market was the Magnificent Seven and everyone else. That trade has cooled. Call it AI fatigue — a growing suspicion that the payoff from all that capital spending is arriving slower than the valuations assumed. Year-to-date, the Magnificent Seven is up just under 5%, while banks have doubled that performance, as shown in the chart below.

The setup is seductive: banks offer real, transparent earnings today and 3–4% dividend yields, against tech's promise of earnings tomorrow. Layer on a distinctly pro-bank posture in Washington — easier capital rules on the horizon and an M&A pipeline that's been building for months — and you have a structural story that goes beyond one good quarter. Citigroup, the sector's long-time problem child, has been one of the best-performing large banks over the past year on exactly this narrative. I'd just offer one note of market history here. Rotations of this kind are healthy — a broader market is a sturdier market. But “the boring sector everyone suddenly loves” is a phrase that has marked more than a few tops. When the last skeptic finally buys the bank, there's often no one left to do the buying.

What Ally and I are actually telling clients

None of this is a call to sell your banks. The businesses are well-capitalized, the dividends are real and growing, and the franchises are among the best in the world. If you've owned them through this run, congratulations — you've been paid handsomely for patience. But two things can be true at once. The banks can be excellent companies and be priced for a degree of perfection that leaves little margin for error. That's the conversation Ally and I have been having with clients whose portfolios have quietly become very bank-heavy after a year like this. Not “get out” — “check your weighting.” A position that was a prudent 5% two years ago may now be an outsized 9%, not because you added to it, but because it ran. Trimming back toward your target isn't a bet against the banks; it's a refusal to let a single trade decide your outcome.

What to watch

Three things over the next few weeks. First, the U.S. regional banks and the rest of the Q2 reports — the mega-caps had a party, but the health of the real economy shows up in the smaller lenders' credit numbers, not Goldman's trading desk. Second, any hard signal on USMCA; the tone has improved, but tone isn't a signed agreement. Third, and most important, watch what happens the first time capital-markets revenue disappoints. That's the quarter that tests whether these are structural-growth multiples or a cyclical mirage wearing a growth costume.

And then you look up from the screen, and the sky is still that colour. It's worth remembering, on a week that gave the banks so much to celebrate, what's happening outside the quote machine. The fires are still burning. Families in the north are still out of their homes. Parents from Toronto to the Kawarthas kept their kids inside, and somewhere a grandparent with bad lungs spent a gorgeous July day sealed in with the windows shut. A record on Bay Street doesn't mean much to any of them right now.

Here's the thread I keep pulling on, though. Weeks like this are a reminder that building a more resilient, lower-carbon economy isn't an abstraction or a political slogan — it's one of the largest capital-allocation challenges of the next quarter-century, and it will need precisely what banks are built to supply: financing, risk management, and patient capital at scale. How the big lenders choose to lead on that will shape returns for decades, and it's a question Ally and I think every investor should be asking of the companies they own. The institutions with the strongest balance sheets have the most to contribute here — and arguably the most to lose if the world becomes harder to insure.

So enjoy the view from up here, by all means. Just keep one eye on the air quality index if you're out on the water this weekend, and spare a thought — and if you can, a hand — for the people up north who didn't get to choose whether to breathe this in.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.     

Andrew Pyle