Canada’s role in a late-cycle market

Late in a market cycle, the signals tend to blur. Fundamentals remain supportive and investors are still being rewarded, but elevated valuations have left markets more fragile. Concerns around the U.S. economic outlook are reinforcing that late-cycle dynamic, sharpening investor sensitivity to risk, concentration, and the sustainability of returns.

That environment calls for a reassessment of what may have been underappreciated. It is often said that Canada is an income market. Growth lives elsewhere. Years of political noise, uneven growth expectations, and global macro uncertainty have shaped a perception of domestic equities that no longer aligns.

Chris Heakes, portfolio manager at Harvest ETFs, has spent much of the past year pushing back against that kind of simplification. He joined Harvest in early 2025 after more than a decade in portfolio management, stepping into a market that had delivered strong results while still carrying a surprising amount of skepticism.

“It was a volatile year, but it was a good year,” Heakes says, pointing to both market performance and Harvest’s own experience. “If we can rinse and repeat that, we’ll be very happy.”

That comment reflects a broader belief that Canadian equities are better positioned than many investors give them credit for, particularly as policy signals turn more constructive and fundamentals reassert themselves.

A market performing better than its reputation

Canada enters 2026 with no shortage of risks. Global trade negotiations remain unresolved. Political noise has not disappeared. Volatility is likely to persist. Yet Heakes argues that focusing exclusively on those uncertainties misses what is actually happening within the market.

“There’s been a lot of pressure, especially coming from the U.S., and it can make people less constructive on Canadian equities,” he says

Over the past five years, the TSX has delivered annualized total returns of more than 16 percent. That result surprises many investors, particularly those who continue to frame Canada primarily as a defensive or income-only market.

“I think one of the big challenges is cutting through the skepticism,” Heakes says. “There’s a tendency to focus on the negatives, but when you actually look under the hood, there are a lot of very strong businesses here.”

He points to multiple areas of strength across the market. Canadian banks posted exceptional gains last year. Shopify delivered growth comparable to global technology leaders. Energy and pipeline companies continue to generate durable cash flows. Consumer franchises such as Dollarama and Loblaw remain deeply embedded in domestic spending patterns. Gold equities, now carrying a higher weight in Canadian indices, have benefited from renewed interest in real assets.

That breadth underpins how Harvest thinks about Canadian exposure across its equity income ETFs. Rather than anchoring portfolios to a single outcome, each strategy emphasizes diversification and quality, while approaching income generation from a different angle.

HLIF, for example, focuses on Canada’s dividend leaders with long track records of dividend growth. “Dividend growth is really where you want to focus,” Heakes says. “High quality companies with the ability to grow dividends tend to outperform over time. Simply chasing a high yield can lead to problems.”

HVOI takes a more defensive approach, emphasizing low volatility stocks within the Canadian market. For Heakes, that design becomes particularly relevant as markets move deeper into a late-cycle phase. “Reducing volatility and managing drawdowns matters more when valuations are elevated,” he says.

HHIC sits at the other end of the spectrum, combining covered calls with modest leverage to tilt more toward growth while still generating income. “Covered call equities can perform very well in a modest bull market with volatility,” Heakes says. “That kind of environment can be positive for these strategies.”

Income and growth are not opposing forces

One of the most persistent misconceptions Heakes encounters is the idea that investors must choose between Canadian income and growth elsewhere. He views that framing as increasingly outdated.

“If you look at five-year total returns, the TSX has actually outperformed both the S&P 500 and the Nasdaq,” he says. “That surprises people. The narrative that you go to Canada for income and somewhere else for growth is a bit of a false one.”

Canada does retain a structural advantage when it comes to income. Dividend yields remain meaningfully higher than those available in many other developed markets. But Heakes emphasizes that not all income is created equal.

“Dividend growth is really where you want to focus,” he says. “High quality companies with strong dividend growth tend to be the outperformers. Simply chasing a high yield can lead you into yield traps or situations where dividends are eventually cut.”

The same principle applies to option-based income strategies. Covered calls can be effective in markets characterized by modest growth and volatility, but they require discipline.

“There’s always a trade-off between income and growth,” Heakes says. “Higher income generally means less upside participation. The important thing is that clients understand that and have reasonable expectations.”

He cautions that selling away too much upside in pursuit of yield can undermine long-term results. Experience, he argues, plays a critical role in managing that balance.

Portfolio construction in a late-cycle environment

Heakes describes Harvest’s current framework as a barbell approach.

“On one side, you still want growth exposures,” he says. “On the other side, you want strategies that are more defensive, whether that’s dividend focused or low volatility.”

Canadian equity income strategies fit naturally on the defensive side of that barbell, particularly when valuations in other parts of the market appear stretched. Heakes believes advisors generally understand how to use these tools and does not see widespread misuse.

“Covered call ETFs are often taking some risk off the table,” he says. “You might give up some upside, but from an implementation and suitability perspective, that can actually help clients.”

Canadian equities provide the combination of higher income, sector diversity, and companies with long operating histories. This offers something that is increasingly scarce in more concentrated markets: balance without stagnation.

Heakes views that balance as particularly relevant now. Strategies such as HLIF, HHIC, and HVOI reflect different expressions of the same underlying objective, capturing income while managing volatility and avoiding over-reliance on any single market outcome.

“Don’t forget about Canada,” Heakes says. “There are a lot of great stock stories here, and it’s a very strong complement within a broader portfolio.”

This article was produced in partnership with Harvest ETFs