In a recent analysis by Scotiabank strategists Hugo Ste-Marie and Jean-Michel Gauthier, there are strong indications that Canadian bank stocks are on the verge of a significant breakout.

The ZEB ETF, which evaluates the performance of Canadian banks, has returned to highs not seen since early 2022. However, with an overheating market indicated by a 14-day RSI of 79, the journey beyond this threshold may prove challenging.

Still, a significant catalyst is imminent: the release of Q4/2024 earnings from all Canadian banks this week, which will also include crucial guidance for fiscal year 2025.

Analyst Meny Grauman from Scotiabank GBM emphasizes that, while markets generally take a forward-looking approach, bank stocks are particularly influenced by the potential turning points in the credit cycle.

Investors seem to be focused less on current performance and more on the anticipated improvement in the operating environment. Grauman states, “If the major Canadian banks provide an optimistic forecast for 2025—something we indeed expect—the ZEB ETF could experience a tremendous breakout, propelling its growth trajectory for the foreseeable future.”

Further analysis from CIBC's Sid Mokhtari reveals a notable technical strength in domestic equities relative to the S&P 500.

He points out that when both October and November see positive returns, the TSX index tends to rise an average of 2.12%—significantly higher than the SPX’s average of 0.79%. His reports suggest that the TSX could offer a more reliable avenue for returns as year-end approaches, particularly as industrial and financial sectors traditionally take the lead in strong economic cycles.

Despite this positive outlook for Canadian banks, there is a stark contrast when comparing corporate profits in Canada and the U.S.

BMO's senior economist Sal Guatieri highlights a troubling gap in profitability attributed to factors such as elevated interest rates, fluctuating energy prices, and a lackluster economy.

While profits for Canadian nonfinancial companies remain above pre-pandemic figures, they lag significantly behind the remarkable 85% surge experienced by U.S. firms—a disparity that raises concerns about Canada’s competitive edge in global markets.

As the financial landscape evolves, all eyes will be on the forthcoming earnings reports from Canadian banks early this week. Analysts and investors alike are keen to see if optimism will prevail and propel stocks into a robust breakout phase.

With critical trends and indicators aligning, this could indeed be a pivotal moment for the Canadian banking sector. Stay tuned for what could be a game-changing week!