Hello and welcome to The Download. I'm your host Dave Richardson, and it is time for Captain Canada, Scott Lysakowski on from Vancouver, who keeps us updated on the Canadian equity market. Scott is the head of Canadian equity. You dabble in the US a little bit too, don't you?

A little bit. Mostly Canada. We are predominantly Canada. Captain Canada, I still struggle with that. That's a big title to live up to, but I will be your Canadian spokesperson for the Canadian equity markets. I'm happy to take that role.

I'm not sure because if I recall collecting comic books as a child, Captain America or Superman were more of the really powerful superheroes. Captain Canada was too nice.

A real nice guy.

He apologized for getting in the way. And a good market though. Good first half of the year, Scott. You always keep us up to date. We always like to check in this time of year and do a mid-year review. And of course, we had you on at the start of the year. You thought it would be a pretty good first half for Canada, a pretty good year overall. And that's how it's turned out. And then there's some particular areas that I know you were also particularly fond of. They've done well. Why don't I let you do it instead of me doing it? Because otherwise we don't need Captain Canada. We can just go with Captain Cherubic Guy.

Yeah. Head nodding.

Yeah. Head nodder guy.

Yeah, so it's been a good start to the year. I'm just looking at our year-to-date returns for the TSX, up 11% so far year-to-date. We're just over halfway through the year. So that's a pretty good start. As we know the annual average is around 7 or 8%. So we've done more than the average in just half the year. Canada last year had been a leader amongst equity markets, but this year is just more holding in within the group. The US has regained its leadership. I'm looking at returns in Canadian dollars— and we know that the Canadian dollar has been a little bit weak— so those US dollar returns for the US markets look even a little bit better in Canadian dollar terms. From a sector composition, it's the traditional sectors. When you're having a strong market for Canada, you'd expect to see energy, financials, materials— and that's a bit of a mixed bag right now for Canada with gold being down, but the other parts of the material sector being up— and industrials are starting to participate. So the typical setup from a sector composition is positive for Canada. And Canada has maybe lost a little bit of its breadth in the last quarter, 3 months, as gold stocks have consolidated. So some of those stocks have gone down. And then we've got a lot of volatility in the energy sector, which I think we're going to touch on a little bit more deeply. We've seen continued strength in the US markets. And even globally. I was looking across all the different equity markets and we're seeing these double-digit returns. It's interesting. We were at our summer barbecue last night. People are fickle when it comes to equity market returns because when the returns are good, they're too good and people are worried about the downside, and when returns are bad, people are frustrated because they're not good enough. And so when we think back over the last year, 2025, a very strong year for equity markets in Canada in particular. And then we're seeing a lot of that follow through. The other thing, when we think about not only the sector composition of the returns, we just think about the composition of returns between earnings growth and multiple expansion. And so over the last couple of years we had seen some earnings growth, but we had also seen some multiple expansion. This year so far, of the 11% returns for the TSX, we're getting positive 16% in earnings growth, but we're having a bit of multiple compression on the back of that. Similar type event is happening in the US. Earnings growth is very strong and you're seeing some of the multiple compression offset some of that.

Which we love, by the way, right? We like that?

We are fine with that. Markets are very efficient and they're very forward-looking. And so last year when you see the equity returns driven by multiple expansion, you want to see that earnings growth follows through, and that's what we're seeing today. And then the estimate revisions or the earnings growth forecast is also very strong. So people say, well, markets have been really strong, we have to have downside. And there's always things to worry about in equity markets, and there's certainly some things that we would worry about within the Canadian equity market. But more broadly, the earnings growth and earnings growth forecast has been very strong. And we've seen strong earnings growth forecasted for Canada. We've seen that start to accelerate. There are a few little headwinds that I think we need to talk about, namely within the energy sector and gold in particular. But if you're thinking about earnings growth both for Canada and the US, we're seeing that strong double-digit earnings growth. When we were out doing the roadshows and client presentations over the last several months, we had talked about big earnings growth coming from the energy sector as oil prices had gone up. Now they're coming down. So that's going to be a slight headwind. And we had some risk within the earnings growth for the TSX where you have probably about a third or a quarter of it coming from the gold sector. And the last time we spoke, we said the gold price is consolidating. Correcting. I don't know how you want to describe this price action, but it went to $5,000 and it's bouncing around $4,000. And the estimate revisions were still positive the last time we spoke. Now we're seeing that dynamic shift a little bit. When I talk about the commodity sectors, I always think about the fact that the price is really hard to predict. So I always think, what are the other people doing? So the analyst forecasts for the gold price are probably still in that $4,500 range and the spot price is below. So as time ticks on, the analysts either have to move their earnings estimates lower or the gold price has to go up. I don't know what the gold price is going to do, so I'll suspect there's going to be a headwind to that earnings growth forecast coming from the gold sector. Similarly in oil— and I think we'll get more in depth in what's going on with oil— but there's a headwind to the estimate revisions coming in oil.

And with the price of gold, the multiples have been contracting as the price was falling. Just to validate my role here, as we said, we get the multiple expansion and you want to see it followed by earnings. If you go on a 5 to 6 minute straight diatribe as a podcast guest, you want to see lots of good head nodding to follow from the host. So, that's what I was able to do. I think that was one of my top head nodding sections. For those of you who subscribe on YouTube, you can see my bobbing head, which is larger than it was 6 months ago too. So, I'm growing just like the earnings forecast for the TSX. And you can subscribe to us on YouTube. You can follow us anywhere on any of the places you get podcasts. We love to get new followers. I think I picked up a lot on my tour of Winnipeg this week— lots of people signing up for the podcast. So we continue to grow, and that's great. Thank you everyone for your continued listening. So Scott, if we look at gold— we'll start there, and then we'll work through to some of the other sectors— but when I'm out, I get a lot of questions about gold. It peaked around $5,600 US. It dropped a little bit under $4,000 at one point, but like you say, it's kicking around $4,000 an ounce, which a year ago we would have said that's fantastic, but now it's part of a correction. So I get those questions from people. We always talk about the conditions that you need to have in place to drive gold prices higher. And we certainly had those conditions in place. And if we get through this war, I guess you could see a return back to those kind of conditions where inflation is a little bit higher than normal, rates are still pretty low. So you've got a negative or very low real rate of interest. You still have some central banks buying. This is part of a broader strategy out in the BRICS. And price production goes up. There's a bit of a supply-demand imbalance. The US dollar, which has been surprisingly strong, that was an offshoot of the war. You would still expect the US dollar to be weaker over the next few years. So the underlying conditions would be there, or am I missing something around that? And once you start to let some air out of the balloon, you got to wait a little period before it starts blowing back up again.

Yeah. Commodities in general are difficult, and gold is especially difficult because there's a number of conditions that make gold strong and it depends on which ones. I think you've hit quite a few of them. I'm not going to dodge the answer or dodge the question completely, but I think the framework we take is: we don't know. Sometimes it's better to know what you don't know. When you don't know, you don't have a strong view. That's helpful when we're constructing our portfolios. I think the things that I would be focusing on are these headwinds and tailwinds of price versus estimate revisions. So the gold price has corrected. It's corrected to a level that's still relatively high. The other thing I would say is predicting the price of gold is very macro, and those are interesting conversations and thoughts that we need to have and be aware of, but at the end of the day, we're stock pickers. We want to see what are the fundamentals of the actual business. So there's a couple of ways that we break this apart. One, you have to think about the second derivatives. The gold price is high, but not as high as it was. The gold price is probably below where the analysts are expecting or forecasting it to be. So that dynamic takes place where you either need the gold price to go up or the analyst estimates to come down. Stocks generally don't do well when the earnings revisions or the estimates are coming down. So, there's point number one in the short term. Point number two, in the medium term, yes, gold prices are not as high as they were, but they're still at a high price. And if you think about the fundamentals of a gold company, they sell gold ounces at the gold price, the prevailing, the spot price or whatever their contracted price is. And then they have their cost structure. You think about their operating costs, their cash taxes, interest, the sustaining CapEx required to maintain their existing mines. And then you think about the difference between those two. You add up all their costs, and you take the price, the difference, that's their profit. And so while the gold price is down from its highs, it's still relatively high and it's a lot higher than their cost structure. So these gold companies are generating a significant amount of free cash flow, which makes an interesting dynamic for the stock. On the one hand, you have the estimates coming down and the gold price coming down potentially, or at least consolidating— I don't know if this is a full correction or more of a consolidation— and then you have the estimates coming down. So it's going to be a bit of a headwind for the stocks, but the companies are insanely profitable right now. I think we've probably talked about this previously on the podcast: always careful not to be the «this time it's different» commentator, but there is some nuance difference between what gold companies, how the producers are behaving in this environment than they have in previous environments. In previous environments where the gold price has been strong, the typical behavior of the producers, gold companies, would be to be growing production, getting as much gold out of the ground as they possibly can, selling into this high gold price. And what we're seeing today is a slightly different approach where they're being more disciplined with their capital. They're not growing production, they're not chasing M&A to backfill their resource. You're seeing a few of these things, but what they're being disciplined about is not chasing production growth. They're focusing on their balance sheet. They're maintaining a strong cost structure. They're returning capital to shareholders, which is a very welcomed behavior for us as long-term investors. Because the thing that long-term investors and fundamental investors struggle with the gold sector is that it's a really hard business because you're producing a commodity that no one really actually uses. Oil, copper, uranium, potash, silver — we have uses for those things. But gold has not a big industrial use, so that's hard to figure out. And they have a lot of macro things driving the price. And then you had this undisciplined behavior from the actual companies. That's a tough setup for a long-term fundamental investor. So to see them shift a little bit more towards this disciplined approach of not chasing growth and being thoughtful about how they allocate capital and giving some of this excess profit back to shareholders is something that we welcome. The weight of gold sector in the TSX got as high as 15%, maybe even 16%, and now has checked back to 11%. And I would be happy. I think a lot of Canadian portfolio managers bemoan the gold sector as it's hard to predict and the volatility, etc. But if this was just a regular kind of commodity mining business that, okay, the price of the commodity is hard to predict, but the companies are disciplined with their capital and these are good long-term investments that you can own. Not every single gold company I think would behave this way, but some of the larger, higher quality names would behave in this disciplined manner. I welcome that. I need more stocks to invest in in Canada, even if they come in a more volatile sector. So we are welcoming this discipline and find it refreshing, to be honest, that these companies are changing their behavior.

We had Sarah Neilson on a couple of months ago— and we should have her on in the next couple of weeks— the head of North American Equity at RBC Global Asset Management. And she was talking about the idea that if you looked at the gold stocks relative to the price of gold, with the cost structure that you talk about, that the gold companies had already been rewarded in terms of expanding multiples much more than energy companies. They were much more vulnerable to a drop in the price of gold than the energy companies, which for whatever reason seemingly had not been rewarded for what could potentially be higher prices. And then even when prices moved higher, you got a little bit of a pop out of it, but the pop was in advance of it. They really didn't go that far even when oil got up to $120 a barrel. So that was one of the reasons that gold was pretty tough. And then you say it gets up to a level, at the high end of the composition of the TSX, 15 or 16%, that's much more than normal. And as I tell investors, what do you use it for? Well, my wife will jump right in and say she loves her gold jewelry. I'm sure your wife does as well. And my daughters love it. And so we're pretty good at buying gold, but we're not buying in bulk. What would you say that the cost of production is for a typical gold company in Canada? $2,000 an ounce? $2,500?

Yeah, if you factored in everything— their sustaining capital, operating costs, dividends, cash tax, interest, all those sorts of things— yeah, it'd probably be in there in and around that range. So yeah, a lot of downside, and these companies are still profitable. Don't get me wrong, if gold goes to $2,500, these stocks are going lower full stop, but the thing that I'm really focused on right now, if we think about the forecasted earnings growth for the TSX, earnings growth is expected to be north of 20% in 2026 and into '27, normalizing into 10%. I worry a little bit that probably, like I said, 20 to 25% of that is going to come from the gold sector. And so, we'll start to see some negative revisions. We've already seen a few estimate revisions, and we'll probably see a little bit from the energy sector as well in the near term. But I think there's a more interesting story to play out in energy over the medium to long term. The one thing I'm mindful of is that estimate revision, the earnings growth for the TSX is going to be fighting into that. And I wanted to finish that point about the puts and takes of energy and gold are going to drive headwinds potentially from the earnings growth, the headline earnings growth number. But I don't think anyone expects a 22% or 20%+ earnings growth for the TSX is something that's going to be a repeatable or a sustained number. But when we were out on the road back in the spring, the thing I was really trying to get people to focus on is this idea, the middle of the market— industrials, consumer, banks earnings have been strong. I'm sure we're going to talk about that at some point, but it's the rest of the financials. That's a big chunk of the market. Well, yeah, Canada is really driven by energy and materials, but if you just thought about that, that's the middle of the market. Technology, we're seeing double-digit earnings growth forecasted for that. So yes, there's going to be some puts and takes, a bit of noise around gold and oil. But the middle of the market, the earnings growth from the middle of the market or the rest of the market is chugging along quite nicely at that 10 to 15% range, which is quite healthy to see.

Yeah. So I was just going to finish on a point that I was sharing with a lot of investors this week when talking about gold, because I think it is related to what you see in the US with some of these AI names and particularly semiconductors, the chips. Over the long term, fundamentals are going to drive the value of something. If we say that the value of an ounce of gold should be the price to produce the next ounce, thereabouts, so you say it's $2,200, $2,500, somewhere down in that range, and you're at $5,600— and like we say, you can't do anything with it— really, it goes up because someone's willing to pay $5,601 for it, or $5,700, or however high it's going to go. At some point, fundamentals matter. When you just get to a crazy point, no one's going to pay you more. And you've kind of seen some of the same thing happen with a Bitcoin or with a semiconductor or storage stock up 600% or 700% over the last 12 months. Yeah, these are good companies. They're making money. Just like an ounce of gold is worth something. But you get to a particular valuation, and it's just so removed from the fundamentals that at some point the air comes out of the balloon. And if you're holding the balloon, if you jumped on the balloon at the top, it can be a bit of a long way down. However transitioning to oil, I was out with a friend golfing, and he likes his oil stocks, and he said, Dave, I'm going to sell all my oil stocks when the war's over. This was a couple of weeks ago before we got into wherever we are with the war right now. But certainly, oil prices dropped down. And I said, not so fast, because when I talk to you— and Sarah was making the point too— the Canadian energy companies do a phenomenal job of managing their cost structure. I'll leave it to you because you're the expert in this area. These companies can still do okay?

Yeah. There's never a dull moment in this part of the market, that's for sure. There's lots of movement and a lot of noise. I was trying to think about how to describe it to our listeners and try to keep it simple, thinking about our moms when they're listening and thinking I don't want them to turn it off and this is too complicated for me. But one of the things, as an observation I find quite fascinating: before the war ended— and I'm not entirely sure it's actually over, but this again, these are too hard for me to figure out— but before we had this «quote unquote» ceasefire, the narrative around oil was that it was going to be higher for longer and we're going to run out and all this stuff. And then we had this agreement and it was, we're going to be awash in oil. The narrative flipped so quickly within a very short period of time. As a market observer and participant, it’s just wild how quickly and how extreme. But I guess that's the market these days. I think the sentiment shifts from one end to the other. So one of the things I'm doing as an investor is just trying to remove myself a little bit from the day-to-day swings in sentiment on this. The other thing that we're thinking about— and there was some good research published this week on the subject— within the energy markets, there's a fairly large disconnect between what you see in the spot price and what's happening in the other parts of the energy market. And there's going to be a lot of noise in the spot price. Everyone, when they open up the newspaper or turn on their phone— Bloomberg, Wall Street Journal, whatever— you're going to look at the oil price and that's the front month. That's the spot price. And that gives us a lot of information about direction and that's going to drive sentiment, it's going to drive stocks. So we need to be aware of it. But we have to think about the fact that the businesses don't sell all their oil this month. They have reserves, they're going to sell it over the next number of decades. And so we have to think about what's the curve look like, and there's some dynamics around supply demand that are driving the front month versus where the curve is. And so if we take a step back and say, okay, we had this event, the front month is a reflection of the current supply and demand, and we have to think about there's the physical market and the financial market. I haven't checked these numbers recently, but the financial market is significantly larger than the physical market. For example, you and I and our listeners can trade oil futures, whether it's through an ETF, they might even have a futures account to trade, but none of us are taking physical delivery of crude. You don't have 1,000 barrels showing up in your backyard because you've bought it because you like the price. There's the physical market versus the financial market. The financial market's much larger and some of it is actual commercial where a producer is hedging, but you would also have what we call speculators. So people are taking a view on the price of oil. So that's going to cause a lot of noise on the front month and out into the curve. The other thing to think about is the stocks. These stocks have 20 years or more of oil in the ground. They're going to produce for a long period of time. So we're not really thinking about, we're going to value stocks at 100 when the war was at its peak, and we're not going to value them at 60 or 65 or 70, what we see today. Certainly, we're not going to value them at the -26 that we saw for a few brief moments in the pandemic. We have to disconnect all of that. If you look at the forward curve, it has moved up through the conflict and has come down, but it has come down to a higher price. That's good. You've probably made a good tip to your friend on the golf course that maybe don't sell them all because while the prices come down, the long-term price is settling out at something higher. The other point that I would make is that we can think about the spot price of oil, but we should also think about the implied price that comes from the refined products. And this is where I was trying to think about how can I explain this simply? I said, you're not going to take delivery of a barrel of oil. Oil is of no use to you or me. If someone came to you, if your buddy said, hey, Dave, thanks for the tip on the golf course, I'm going to drop off a barrel of oil for you and give it to you for free. You're like, well, gee, thanks, but I have no use for that. You're not going to convert that into gasoline in your garage and put it in your car. It doesn't have a use directly, but it has worth, because it has value. But what you really need to do is you need to convert that into something you use. So maybe you don't need a barrel of oil, but you might need gasoline, you might need jet fuel. You fly around a ton, so you definitely need jet fuel. Diesel. The economy needs the refined products. And so what we're observing today is the front month, the spot price of oil has come down quite a bit, but the refined product market hasn't corrected as much. It's corrected some, but certainly not as much, probably about only half. And there's a number of reasons driving that. One, when we were through this period of disruption, the refineries weren't able to access crude. And so, we were drawing down. Remember, there's all these concerns. It wasn't that long ago, people were worried about their flight in August in Europe at risk of getting canceled because there's no fuel. Well, we've forgotten about that. That's maybe less of a risk now, but the risk today, those inventories have come down. So our refined product inventory, where we're thinking about gasoline, diesel, jet fuel, those are sitting below the long-term average. So we need to refill those. That's why we said the reopening trade of the Strait of Hormuz is going to put some pressure on the front month, but we still need to replenish. There's a reopen and then there's a replenish. We need to replenish the products, and we need to replenish the strategic petroleum reserves that have been released to alleviate some of this pressure. So what we're seeing now is the implied price— and this is where I will not go into the weeds, but if you look at the price of all the refined products and then you can calculate what's the implied oil price based on those refined product markets, is that the implied oil price in the refined product markets is significantly higher. I saw one analysis this week, that's closer to $90 implied. And so those refiners, first, they're probably going to be very profitable in the near term because they're keeping the refined product prices high while they replace inventories, and their feedstock, which is the front month oil price, is low. So the refining margins are going to be very, very strong. So companies that are direct refiners— or within Canada, we have something called an integrated producer that has some oil production as well as a refinery embedded in it— you could expect given this environment that those earnings are going to be fairly strong. And so that's something that we're quite mindful. When people say, well, war's over, oil price has gone down quite a bit, I'm out. I actually think that's the first step. The next step is replacing the product inventories. And in order to do that, because inventories were so low, the refined product prices are high and the price that's required or implied by those refined product prices is much higher for oil. That's a constructive view over medium term.

The real-life example of that, the gas price of the local pump. It shot up as the war started and the energy price and oil prices started going much higher, and now it's drifting down. Up like a rocket, floats down like a feather. And you go, well, why? The price of oil is down. Why aren't I seeing the gas price go down? Now, it's the way that prices are set at the pump by individual retailers or companies that have retailing operations, but it tends to come down slower. And this is in the real-life setting. Not in that production world. But that's where you see the difference. Because I can see the spot price of oil, but I can also go to my local gas station and say, hey, the price hasn't come down as much as the price of oil's come down.

Yeah, I was asking AI, how do I explain this more plainly? And they gave an example, which I thought, Dave will love. Think about the price of coffee beans. If the price of beans came down, but the price of lattes hasn't come down because we're undersupplied of lattes. I don't know if that's a very clean example, but the idea. Maybe the bean example isn't that great because if somebody dropped off a big bag of beans at your front door, you would have a use for them. You can convert those beans into coffee in minutes and probably do a very nice job of it, I would imagine. So it's maybe not the greatest example. Maybe it's the flour and the bread. If the price of flour has gone down, but the price of bread hasn't changed. That's the one thing that we're keeping our eyes on. And then the last piece is, as you said, this could be good for Canadian producers because their businesses are in great shape. $100 oil, these guys make a lot of money. And at $60 oil, they also make a lot of money. They've been working hard to keep their cost structures down and they've been disciplined with their capital. Their balance sheets are in great shape. And then the final piece— and I think I talked about this at length last time, so I won't go so long on it— but we've gone through a decade of underinvestment. And this event, this war in Iran is sort of a wake-up call for the global energy market. It's not so much to say, do we have enough oil globally to satisfy demand. It's where does your oil come from? How does it get to market? Who is your counterparty? And so Canada has the potential to play an interesting role where our businesses, the oil producers are in sound financial shape. We have lots of reserves. Reserve life indices have been dropping in most markets, but Canada, because of the nature of the oil sands and the type of reserves we have, they're very long life. So we have long reserve life. We have excess pipeline capacity. Pipelines are in the news. We just had Calgary Stampede, so there's a few extra bits of announcements. I was joking with the team the other day: we're announcing pipelines like Oprah gives away books. You get a pipeline and you get a pipeline. And that's great because we know those things have been hard to build and I still suspect they will be challenging to build, but you've seen a lot of announcements and I wouldn't put my chips on any single one of them, except I would say that generally speaking, there's expansion of takeaway capacity for Canadian oil. And probably one of the most important ones was something we saw more locally, the TMX, the Trans Mountain Pipeline, that has applied for an expansion and has done an open season and has got authority approval from the Port of Vancouver to increase capacity. So that's a really important one because that's really just expanding an existing pipeline— it doesn't go down into the US— but it actually gets you onto tidewater and into global markets. So there's a really nice setup for Canada. I think we are well into our new prime minister's mandate. In the past we'd say, ok, saying the right things, but we'd like to see some action. I think we're seeing it now. I didn't go to Stampede, but from what I gather, the community there was feeling quite positively positioned or had a positive outlook on the follow-through from the government and regulatory. And if you think about Canada, it's a relatively low-cost producer globally, long reserve life, good counterparties. We definitely are a safer geopolitically partner for global energy. So in the near term, the spot prices are going to move around. In the medium term, the oil price needs to be higher to replace the product inventories. And then over the long term, I think Canada has a role to play in a global energy provider to diversify away from these more geopolitically sensitive parts of the world.

Ladies and gentlemen, that was Captain Canada— not Scott Lysakowski— with that last little bit there. You're waving the flag. But we've talked about this a lot on several different episodes and on several different fronts: it looks like Canada may be starting to take advantage of some of the things that we're blessed with. We'll just leave it at that— we don't get political on this podcast— but we'd love to see the Canadian economy take advantage. One of the questions I got from the audience when I was out the other day. Someone had a young son who is just about to finish up university and looking at the job market— which is somewhat hopeless for younger people these days— and a better economy and a little bit more growth would help that next generation. That would be good news. So I am always glad when you throw the cape on, get the big C on your chest, and start talking about that. And let's finish off with what Captain Canada would always talk about— especially if he worked for the bank— let's talk about banks because Canadian banks have been on fire this year.

Amazing. Yeah, I was saying, that was topic number one, the price of bank stocks. And there's an old saying, people can't stand the prosperity. These things are just too good. And so they'll complain when it's not going well and they'll complain when it's going really, really well. The performance of the Canadian banks has been spectacular, to say the least. And there is maybe some concerns. We shouldn't just revel in the strong price performance. That comes with a number of things. And one of them is a valuation that remains stretched, certainly above the long-term average and probably ticking above or pushing into the high end of where they've traded historically. So quite mindful of that, and that just means the expectations are really, really high. When people say, what's going on with this? I think the thing with the banks is that there's a number of drivers— and Stu's done a really good job of breaking this down, so I’ll steal what he says: there's a number of earnings drivers for the banks and you're never really going to get all of them firing at the same time. But we are and have been in a period where a number of them are working. When you think about it, loan growth, net interest margins, capital markets activity, the wealth business— which is big within our bank and it's becoming big within other banks— those are the main drivers of bank earnings growth and those are all doing quite well right now. We saw the jobs number this morning. You talked about the outlook for jobs. Unemployment rate ticked down. I know we've had a couple of spotty quarters from GDP growth— I'll leave that to Eric Lascelles to name— but it's a bit of noise. And we're seeing a tick down in the unemployment number. So the economy is generally strong, and we've got all the engines firing. The wild card, the part of the bank earnings that people were concerned about was credit. And over the last 6 to 12 months— if you look at the provisions for credit losses as a metric to judge that— we’ve seen those provisions for credit losses increase and we've started to see them start to flatten out. And then the bank management teams, when they're reporting their quarter, are talking about forecasting that the credit environment, PCLs are peaking and should start to get better. If you thought about the way the market is thinking about banks, they're like, okay, I see all these things doing really well. I see that and I appreciate that, but credit is a big problem. It's probably the thing that you would probably worry the most about with a bank because what happens is if people can't meet their loan obligations, the credit losses that come from that event wipe out your earnings and all the other good things that are happening. And so the market's saying like, yeah, but credit could be a problem. When we start to see PCLs and start to see the credit environment normalize— and it's taking place slowly, it's not a one and done and down— when we're seeing that peak and normalize, I think that's when the market could say, okay, if I'm less worried about credit, I can go back to those good things and I could see the earnings growth. There's a metric that we follow closely— and I think a lot of bank investors do— it's called «pre-tax pre-provision». So it takes some of the noise out of the numbers and if you think about those first earnings drivers, what are they doing? Year over year, these «pre-tax pre-provision» earnings are up 20-plus percent. So all engines are firing, and then you remove credit and you think about, wow, the provisions that banks have made for potential loans that they're not going to get paid back on, those are going to start to get reversed and those get released back into the earnings pool. And so the market's going, holy smokes, I got strong earnings growth, plus I get the provisions coming back into the earnings pool. In addition to that, you have the bank regulator remove some of the capital buffers that they had in place, so now they can go and— I don't know if that's pro-growth— but just removing one of the constraints from the banks, whether they want to use that to increase loan growth, they want to increase dividends and return some of this excess profit that we're witnessing back to shareholders, or if they want to buy back more stock. So I think that's the market bringing some of that good news forward. I'd say the last piece, I talked about those drivers of the earnings growth, those are all firing positively at a time where banks— and I always say this, you and I work here, we know they've been very focused on costs, because all those engines haven't always been firing over the last couple years, especially as we come out of the pandemic. Capital markets has been pretty muted. Now, we're seeing a nice recovery. The wealth business had to get the market recovery working for it. And so, we were in a period of cost containment. And so then, when you get these drivers of earnings growth revenue, acting more positively on a cost structure that's been contained, we call that positive operating leverage.

Operating leverage, yeah.

You realize the enhanced margin, and that's another positive. So when you think about the drivers of a valuation of a stock, it's growth and it's that profitability margins. And so the market has brought a lot of that forward. Now, I'm not going to say that it's completely fine. It's brought a lot of that forward and there are a lot of this good news that's priced into the stocks, But— I shouldn't say «but», I should say «and»— these drivers of earnings growth, so long as the economy holds together and we don't see a wobble, and there's still some things to worry about on that front, whether it's inflation or trade is still lingering in the conversation. So long as we don't see an economic slowdown weakness or these technical quarterly recessions turn into something more meaningful, then those earnings growth drivers will remain, the credit should normalize, and it's hard for bank stocks to significantly outperform given the valuation they're trading at, but we could see them chop around or maybe just move sideways as we normalize that earnings growth continues to follow through. I don't want to say at this time it's different, and there's always something to worry about within the banks, but I think you can wrap your head around, okay, that's why they've been acting so strong is because the underlying fundamentals have been good and some of the worry is starting to come away. So I think that's what's driving the bank stocks today.

The other thing, in the last couple of months, the markets would've sniffed this out a while ago, but what could be good news for the future is with real estate professionals. You look at some of the numbers around the real estate market and really the rest of Canada outside of Vancouver and Toronto had started to do better. Alberta has been kind of odd and always out of sync because of the dependence on that one industry. But the rest of the market. I was in Winnipeg, I was in Ottawa, Montreal, Quebec City, out in Atlantic Canada, all those housing markets have been doing fairly well for a bit now. But you started to see some life come into the Toronto and Vancouver real estate market. Again, that helps you on your credit losses side, and it gives you the opportunity to get more business out of a side of your business that has been underperforming for a little bit. And so, that's another thing to like about the banks. And then, I would like to think we're going to start to see some of the payouts get a little bit better on the dividends because the one thing about the stock price appreciation is you've taken your yields down on the dividend. And that's a factor for a lot of people who invest in Canadian banks.

Yeah. And I believe all the banks have fairly robust share buyback programs in place. And given the valuations, I think they need to be probably a little bit more thoughtful— and we're seeing this in the energy space as well— about how aggressive do you want to be on share buyback at these valuations. And perhaps you're better to return that through a dividend, or maybe you would put that back into your business through reinvesting in loan growth or expanding some of your capital markets businesses, these sorts of things. So yeah, I think the share buyback within a bank probably gets a little bit more challenging as the valuations creep higher. But there's excess capital within the banks, especially if we remove credit from the equation and you have this buffer that has been removed so that capital can now get released. I believe— and this is my own thought— that remover of the capital buffer is the intention for banks to put that back into the economy to spur loan growth. We know that the Bank of Canada is limited on what it can do and it's done its part and it has to manage inflation, especially in the environment that we're in right now with oil prices at risk. So I think that that's the signal is being sent to say, hey, we're going to remove one of these capital constraints from your business model. And the expectation is like, let's get this back into the economy and let's get things going. So I think that was my interpretation of what's driving that removal of the buffer.

Well, Scott, we're in around 45 minutes. That's a great synopsis. 45 minutes well spent for listeners to get a really thorough dive into what's been going on in Canada first half of the year. Looking forward, where we still have very strong earnings growth, an economy that's got some real potential, and some sectors that have some real potential, a couple of them firing on all cylinders already. So it's a pretty good view from your chair, and we always appreciate that. We also had a nice little run in the World Cup. Did you get to one of the games in Vancouver, Scott?

I didn't. As it was very well documented, the price of entry was quite high. June is a busy month in my household as well. So we took it in. I'll tell you that right now, vibes were high. I may have mentioned, I ride my bike to work most days, and my bike route goes down through False Creek. And you probably saw the images on tv, they turned the Science World into a giant soccer ball. So that was the entrance zone for the fans to go into the stadium. And so I rode by every day. Lots of tourists. Actually, going back to the economy, I think there should be a little bit of a World Cup kicker to our economy this quarter. Lots of tourists, lots of people taking their photograph in front of that giant soccer ball. I had lots of friends visit to go to games and said that the experience was great. So we've really enjoyed just being in the city with all the visitors. And the other day when Colombia played Switzerland, that was the last game here in Vancouver. The Colombian fans, it was crazy. You probably saw some of the images. They took over the city. I'm like, where did all these Colombians come from? I didn't think Vancouver had a big Colombian contingency, but clearly some visitors. And so that's always good to see. Vibes were high. It was a good time. And yeah, Canada didn't quite get the result that we wanted, but I think it's progress and we keep inching forward. So it's been great.

I got to see Portugal in Toronto, and I was surrounded by a bunch of Colombian fans who thought Colombia was going to be playing instead of Portugal. And they went down to Dallas and watch Portugal lose. My wife is Portuguese. Regular listeners know that. Scott, I'll just finish off on this: for anyone going to Dallas, coffee lovers, I finally got to Cultivar Coffee in Dallas, one of the all-time great modern coffee places. And it met expectations. So, if you get down that way, Cultivar is the place to go. And the place to come when you want to get great information on the Canadian markets is this podcast, The Download, when Scott Lizakowski is on. Scott, thanks for joining us again, and we'll catch up with you in a couple months.

Thanks for having me, Dave. Take care.