Global Equity Weekly

June 13, 2025 | 16:32

Is the TSX Glitter Economic Gold?

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Equity markets held mostly steady this week despite some geopolitical conflict and a pop in oil prices. The S&P 500 dipped 0.4%, led by a 5% jump in energy, but held back by weakness in financials. The TSX gained 0.3% on gains in health care, energy and materials. While the pop in oil didn't help, the May U.S. CPI report was benign, and there's growing optimism that the trade war will de-escalate further ahead of the G7 summit.

The TSX was churning out record highs this week despite ongoing uncertainty over the economic fallout from the trade war and the reality that Canada’s economy is highly exposed to U.S. trade. Since the start of November (just before the U.S. election), the TSX has outperformed both the S&P 500 and EAFE. Let’s consider a few reasons why, and whether this is a positive sign for the Canadian economic outlook.

It’s all relative (to expectations): The worst-case outcome on the tariff front was arguably priced in back in early April. Through a combination of carve-outs for U.S. tariffs on Canada, and a presumed eventual trade deal (with chatter ahead of the G7), the ultimate reality could bite much less hard. Equity markets are always operating at least three-to-six months in the future.

Source: Bloomberg

The tariff bite is narrow: There are some areas that are under heavy tariff pressure—steel & aluminum and, less so, autos. Most of the remaining tariffs are carved out by USMCA compliance. From an equity market perspective though, steel, aluminum and auto parts (the latter mostly exempt under USMCA as well) barely push 1% of the index. True, the impact of a trade war ripples across other industries, but the direct hit is narrow.

Canadian stocks were cheap: Before the trade war broke out, we were setting up for a solid contrarian year for the economy and relative TSX performance—the latter view shared by our strategy team. The forward earnings multiple was sitting around 15× versus above 22× for the S&P 500, a wide gap from a historical perspective.

Bank of Canada’s head start: An earlier break in inflation and some proactive easing in the early days of the trade war have set Bank of Canada policy rates at a much more neutral level than those in the U.S. The 225 bps of easing in the past year could be taking the brakes off the economy (with a six-to-twelve month lag) just when it needs some help, and the TSX could be reflecting that.

Not the best bellwether: The TSX is notoriously not a perfect reflection of the underlying Canadian economy given its composition. The index is heavily weighted at more than 30% in each of financials and energy/materials. The former will pick up on broader economic conditions, but the latter don’t swing real economic activity as much as they used to. Indeed, gold names make up five of the top ten contributors to the TSX increase this year, and account for almost a third of the year-to-date point gain. On the flip side, exposure to industrials (12%), consumer spending (7%) and real estate (2%) is disproportionately low. Over the past 25 years, the correlation between TSX performance and subsequent economic growth has been positive, but not as strong as in the U.S. where the S&P 500 is arguably a better reflection.

It’s hard not to be impressed with the resilience of the Canadian equity market in the face of a trade war that can potentially do serious harm to the Canadian economy. We’d be somewhat cautious on fully passing this strength through to the economic outlook, but if the market is indeed discounting a manageable outcome—we’ll take it.

Major Index Performance

North American Sector Performances

(% change over period)

Table 1 - S&P 500 Sector Performance

Source: BMO Economics, Bloomberg

Table 2 - TSX Sector Performance

Source: BMO Economics, Bloomberg

TSX Relative Sector Performance

(relative to the index, year-ago = 100; dashed line = 200-day m.a.)

S&P 500 Relative Sector Performance