Canadian Banks Drive TSX Surge as BMO and National Bank Beat Expectations Amid Earnings Momentum

In a welcome rebound for North American equity markets, Canada's S&P/TSX composite index closed up 156.95 points at 34,127.33 on February 25, 2026, marking a significant recovery driven primarily by strength in the financial and technology sectors. This upswing was catalyzed by better-than-expected earnings from key Canadian banks, including BMO Financial Group and National Bank of Canada, which reported profit increases that alleviated investor concerns over consumer spending slowdowns and economic headwinds.

Bank Earnings Take Center Stage

BMO Financial Group shares jumped 3.82% following the release of its quarterly results, which showcased a profit rise surpassing analyst expectations. Despite incurring charges related to layoffs and noting increased strain on Canadian consumers, the bank's performance highlighted operational efficiencies and diversified revenue streams. National Bank of Canada delivered an even more impressive showing, with its stock soaring 6.63% after posting a first-quarter profit of $1.25 billion, a notable increase from $997 million in the prior year. This growth was bolstered by the successful integration of its acquisition of Canadian Western Bank, demonstrating strategic expansion benefits.

Allan Small, senior investment adviser at iA Private Wealth, attributed the market's positive reaction to a rotation back into recently sold-off sectors. "A lot of the stuff that’s been sold off recently is leading the way now. So financials have been sold off. Now they’re leading the way. Tech has been sold off, especially software, and now those names are leading the way," Small observed. He noted that Canadian banks entered earnings season near cycle highs, setting a high bar, yet BMO and National Bank's results proved positive surprises.

Broader Market Context and U.S. Spillover

The TSX's gains were not isolated; U.S. markets mirrored the optimism. The Dow Jones Industrial Average rose 307.65 points to 49,482.15, the S&P 500 advanced 56.06 points to 6,946.13, and the Nasdaq Composite climbed 288.40 points to 23,152.08. Technology stocks, particularly those tied to artificial intelligence, spearheaded the U.S. rally. Nvidia, the AI chipmaker and largest stock by market value in the S&P 500, gained 1.4% ahead of its eagerly awaited profit report due post-market. Small cautioned that Nvidia faces an extraordinarily high bar, with each quarter growing more challenging to exceed prior "incredible" results.

This tech enthusiasm spilled over to Canadian markets, where technology sector gains complemented the financials-led advance. The interplay underscores the interconnectedness of North American equities, with U.S. megacap performance often dictating broader sentiment.

Upcoming Bank Earnings: RY, TD, and CM in Focus

With BMO and National Bank setting a constructive tone, attention now shifts to the pre-market earnings releases scheduled for February 26, 2026, from Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), and Canadian Imperial Bank of Commerce (CM). Analysts project RY to report earnings per share (EPS) of $2.81 for the quarter ending January 31, 2026, reflecting a 10.20% year-over-year increase. RY's 2026 price-to-earnings ratio stands at 14.92, above the industry average of 12.10, suggesting expectations for superior earnings growth relative to peers.

TD faces consensus EPS estimates of $1.63, up 17.27% from last year, with a track record of beating expectations in every quarter over the past year, including a 6.85% outperformance in the prior fourth calendar quarter. Its 2026 P/E ratio of 14.17 similarly exceeds the industry benchmark. CM is anticipated to deliver $1.74 EPS, a 12.26% improvement, having consistently surpassed forecasts, with a high of 5.37% in the last fourth quarter. At a 2026 P/E of 14.02 versus the industry's 12.10, CM also signals stronger growth prospects.

These projections come amid a banking sector navigating elevated interest rates, potential loan loss provisions, and softening consumer metrics. Positive surprises from BMO and National Bank could pave the way for a continued financials rally if RY, TD, and CM align with or exceed these bars.

Macro Backdrop: Fed Policy and Bond Yields

The banking earnings surge occurs against a macroeconomic canvas marked by persistent inflation concerns and Federal Reserve policy vigilance. While specific Fed announcements were absent on February 25, market pricing reflects expectations of steady rates, with any dovish signals potentially amplifying equity gains. Bond markets showed stability, though commodity moves provided context: April crude oil dipped 21 cents to $65.42 per barrel, while April gold rallied $49.90 to $5,226.20 per ounce, indicative of safe-haven demand amid equity volatility.

The Canadian dollar strengthened slightly to 73.07 cents US from 72.95 cents the prior day, supported by the TSX's commodity and financial components. This currency appreciation could pressure exporters but benefits importers and bolsters bank balance sheets with U.S. exposure.

Sector Rotation and AI-Driven Market Dynamics

Beyond banks, the market narrative revolves around sector rotation. Financials, beaten down by recession fears and high funding costs, rebounded as earnings dispelled worst-case scenarios. Technology's resurgence ties to AI optimism, though tempered by worries over capex sustainability. Investors question whether hyperscalers like Alphabet and Amazon can recoup massive Nvidia chip investments through productivity gains. A spending pullback would reverberate through semis, but Nvidia's bellwether status amplifies its influence.

AI disruption risks have triggered sell-offs in software, logistics, and even legal services, highlighting broader market spasms. Yet, the February 25 rally suggests dip-buying opportunities in resilient names, with banks exemplifying value after derating.

Implications for Investors and ETFs

For portfolio managers, the bank earnings validate overweight positions in Canadian financials via ETFs like the iShares S&P/TSX Capped Financials Index ETF (XFN.TO), which likely benefited from BMO and National Bank's outperformance. U.S. financial exposure through SPDR S&P Bank ETF (KBE) or broader S&P 500 trackers (SPY) offers parallel plays. Bond investors should monitor yield curves, as bank profitability hinges on net interest margins amid Fed path uncertainties.

Looking ahead, Thursday's releases from RY, TD, and CM will test this momentum. Consensus beats could propel the TSX toward new highs, reinforcing a soft-landing narrative. Conversely, misses might revive provisioning fears, pressuring financials.

Strategic Outlook

The February 25 session exemplifies bullish undercurrents in financials, buoyed by tangible earnings beats amid a high-bar environment. With U.S. tech providing tailwinds and upcoming Canadian bank reports looming, markets appear poised for measured upside. Investors should prioritize quality names with strong capital positions and diversification, positioning for potential rate stability and economic resilience.

Institutional flows into financials and tech signal confidence, though vigilance on consumer health and AI monetization remains paramount. This earnings-driven rally underscores the sector's foundational role in market advances, offering a constructive entry amid recent volatility.

As North American indices consolidate gains, the banking sector's performance continues to anchor broader optimism, setting the stage for a pivotal earnings day on February 26.