Investing.com -- Bank of America maintained its constructive stance on Canadian bank stocks Tuesday, citing strong earnings momentum and potential for continued growth despite near-term headwinds in the domestic economy.

The firm holds Buy ratings on four of the six major Canadian banks, pointing to capital markets strength, wealth management growth, and share buyback programs as key drivers. Canadian banks have benefited from the country's resource-rich economy and pro-business policies under the Carney government, according to the report.

Bank of America analysts noted that Canadian banks represent approximately 23% of the TSX Index, making the sector difficult to ignore for investors seeking exposure to a potential investment cycle in Canada. The firm forecasts average earnings per share growth of 13.1% for fiscal years 2026 through 2028.

Despite stocks trading near all-time highs and premium valuations versus historical levels, the analysts believe banks could grow into normalized valuations given the double-digit EPS growth outlook and improving returns on equity. Share buybacks are expected to account for roughly one-quarter of forecasted EPS growth.

The firm sensitized fiscal 2027 EPS estimates for capital flexibility to 12.5% Common Equity Tier 1 ratio and normalized impaired provisions for credit losses, implying 5% average EPS upside.

Bank of America identified TD Bank (TSX: TD) as its top pick heading into second-quarter earnings, citing attractive screening metrics, capital markets tailwinds, above-average excess capital at over 14% CET1, and potential for better-than-expected efficiency through AI deployment.

For Royal Bank of Canada (TSX: RY), the firm noted positive EPS revisions and said the stock needs to avoid credit issues to rejuvenate performance. Canadian Imperial Bank of Commerce (TSX:CM) was highlighted for above-average exposure to the Canadian economy and best-in-class execution.

The analysts acknowledged less constructive ground reality, with bank management teams indicating upward pressure on credit costs, muted loan growth in domestic personal and commercial banking, and competitive deposit pricing. However, net interest margins likely have another year of expansion, while capital markets momentum remains strong.

Bank of America revised estimates to reflect softer near-term loan growth and elevated provisions for credit losses. Price objectives were raised based on rolling forward to fiscal 2027 price-to-earnings and price-to-book valuations.