Canada’s Unlikely Triumph: A Market Defying All Odds
From the precarious vantage point of early April, the notion that Canadian equities would conclude their second-best year this century seemed utterly illogical. The global economic landscape was fraught with uncertainty: a U.S. president had unleashed the harshest tariffs since the Great Depression, threatening to dismantle trade agreements and even openly musing about annexing Canada. Domestically, political turbulence only compounded the unease. Yet, against this backdrop of potential chaos, the S&P/TSX Composite Index didn’t just survive; it thrived, delivering a ‘jaw-dropping’ 28% advance by year-end 2025, marking its most significant gain since 2009.
Navigating Geopolitical Headwinds
The initial months of 2025 were dominated by escalating U.S.-Canada tensions. President Trump’s aggressive tariff policies cast a long shadow over cross-border trade, creating an environment of profound uncertainty for investors. However, a crucial turning point arrived when the U.S. administration eventually softened its stance on the most punitive tariffs. Simultaneously, the appointment of technocrat Mark Carney as prime minister in Canada was instrumental in calming financial markets and de-escalating diplomatic friction with the U.S.
The Resilient Rise: A Market Perfectly Positioned
What emerged was a revelation: Canada’s equity market, underpinned by robust mining operations and internationally renowned financial institutions, was uniquely positioned to navigate the complexities of Trump’s ‘new world order.’ The S&P/TSX Composite Index surged more than 40% from its April 8 low, culminating in an impressive 63 new closing highs throughout the year – a testament to a sustained upward trajectory over the latter seven months.
The Pillars of Prosperity: Mining, Finance, and Tech Drive Growth
The remarkable rally was not a broad-based phenomenon but rather a concentrated surge driven by specific sectors that found themselves in an opportune environment.
Precious Metals Shine Bright
Mining stocks proved to be the undisputed champions, with the materials subindex nearly doubling. This meteoric rise was fueled by significant rallies in gold, silver, copper, and palladium. Philip Petursson, Chief Investment Strategist at IG Wealth Management, noted, “The numbers themselves are somewhat jaw-dropping.” He added that the market remains “well-balanced” with “further upside in 2026.” The impetus behind this rally – three Federal Reserve rate cuts – provided a substantial boost to non-interest-bearing assets like precious metals. Gold and silver also served as critical safe havens amidst ongoing uncertainties surrounding U.S. trade policies and geopolitical conflicts in Europe and the Middle East, concerns that remain unresolved.
Petursson anticipates continued support for the S&P/TSX Composite from gold prices, albeit not at the same intensity as 2025. While cautioning against extrapolating this year’s gains directly into 2026, he affirmed that “the fundamentals are still there,” with central banks, including the Fed (expected to cut rates twice in 2026), likely to continue easing monetary policy.
Financial Giants Lead the Charge
Canada’s formidable financial sector, which constitutes 33% of the index, also played a pivotal role. The financials group jumped over 30%, with Canada’s Big Six banks, including Toronto-Dominion Bank and Bank of Montreal, reporting stronger-than-expected profits. Adjusted earnings per share for these institutions rose by approximately 15% on average. The sector, encompassing insurers, asset managers, and banks, benefited from lower interest rates in both the U.S. and Canada, coupled with robust dealmaking and solid lending performance that necessitated fewer provisions for credit losses than initially feared by pessimists. Canadian banks’ 40% gain in 2025 significantly outpaced their U.S. counterparts.
Tech Darlings Add Sparkle
Beyond the traditional heavyweights, innovative tech companies like Shopify Inc. and Celestica Inc. also made meaningful contributions to the index’s overall performance, showcasing the market’s diversified strength.
Navigating Future Currents: Opportunities and Concerns for 2026
While 2025 was a year of unprecedented gains, strategists are now looking ahead to 2026 with a mix of optimism and caution.
Banking on Caution: Valuation Concerns
Despite the stellar performance, some concerns are emerging regarding the financial sector’s outlook for 2026. Craig Basinger, Chief Market Strategist at Purpose Investments, highlights elevated bank valuations at a time when the Canadian economy may begin to feel the pinch of higher tariffs. “Gold, energy — those sectors really don’t care about the Canadian economy, but the banks probably should,” Basinger remarked. “And this just doesn’t feel like the time to be paying a premium valuation for Canadian banks.” The S&P/TSX Composite banking subindex’s price-to-earnings ratio now exceeds 14, a significant jump from below 10 in 2022. Canadian bank stocks are currently trading at twice book value, a notable increase from below 1.4 times book during the market’s April ‘tariff tantrum.’
Oil’s Muted Outlook and Diversification
The Canadian index’s record year occurred despite a challenging period for crude oil prices, and the outlook for oil remains muted. Basinger views investing in oil and gas stocks as a “very contrarian move,” given the ongoing struggle of demand to keep pace with supply. The market also faces potential vulnerability to any downturns in precious metals, with silver already showing signs of a slide towards year-end, despite its overall record gain for the year.
Purpose Investments took a partial underweight position in the S&P/TSX Composite in the fourth quarter, a move Basinger attributed more to “profit-taking after three consecutive years of oversized gains” rather than a negative long-term view of the index.
Global Opportunities for Foreign Investors
Should 2026 bring unexpected upside surprises for oil, strategists like Petursson suggest that Toronto-listed stocks offer an excellent avenue for foreign investors to capitalize on the energy play. Petursson firmly believes in successful investment opportunities outside the U.S., citing Canada, Asia, and Europe as attractive options for global investors seeking diverse pockets of growth.
For more details, visit our website.
Source: Link
