The Canadian equity market is crushing it! Over the last 24 months, the Canadian Equity market, in common currency terms, has been top of the table1. This is remarkable given that Canada’s economy is stagnant, faces meaningful trade uncertainty, and is suffering a productivity emergency. The question is, why? And of course, can it continue?
To start with, it is not a valuation story. The Canadian equity market has risen in lockstep with Earnings Per Share (EPS). Meanwhile, the Price-to-Earnings (PE) ratio has remained essentially flat over the same period. This means that the market has gone up because companies are earning more, not because investors are paying higher multiples for the same earnings.
This matters because when markets rise on expanding multiples, the rally is, on balance, more fragile. It depends on sustained optimism or low discount rates, and it can reverse sharply when conditions change. When markets rise because earnings are growing, the foundation is considerably more durable.
For investors, this is a meaningful reassurance. It is not a market where you are paying a premium in the hope that future earnings eventually justify today’s price. You are, broadly speaking, paying a fair price for existing earnings.
So where is all this EPS coming from? To answer that, you need to understand a defining feature of Canada’s equity market: it is highly concentrated. Financials account for 34% of total market capitalization, with banks alone representing 21%.
Add Basic Materials at roughly 20% and Energy at 15%. Together, these three sectors account for nearly 70% of the entire market. Everything else makes up the remaining 30%. This means that, for better or worse, what happens to commodities and banks largely determines what happens to the Canadian equity market.
Of the three sectors that dominate Canada’s market, the Basic Materials Sector stands out. This refers to companies involved in the discovery, development, extraction, and processing of raw materials.
This includes industrial metals such as copper, nickel, and zinc, as well as precious metals such as gold. Thankfully for investors in Canadian stocks, these commodity prices have soared. These higher prices and solid production volumes have translated to strong earnings. Since the start of 2024, Basic Materials EPS soared - nearly a fivefold increase. The other sectors, clustered together at the bottom of the chart, have moved modestly by comparison but have still performed well.
Digging deeper still, it is Gold that, of all the commodities, is boosting earnings. Canada is home to some of the world’s largest gold miners, and gold has had an extraordinary run as investors sought refuge from geopolitical instability, currency debasement, and rising sovereign debt concerns. When gold surges, the earnings of Canadian miners surge with it, and given their weight in the index, so do Canada’s aggregate earnings per share. Incidentally, earnings for Basic Materials have outpaced investor appetite, sending valuations (PE ratios) much lower than they were two years ago, before the run-up in commodity prices.
So, in sum, Canada’s equity market performance is not a story of broad-based economic strength. It is a story of Canada being in the right place, with the right assets, at the right moment in the global cycle.
So, What Next?
A renewed positive cycle is critical to our expectation that Canada’s equity market will continue to outperform the global equity market as Canada’s relative performance moves lockstep with commodity prices.
As we have shared many times on the Loonie Hour, our view at IceCap Asset Management is that commodities are entering a new bull run. This is due to a decade of underinvestment in exploration and production capacity, deglobalization and supply chain disruptions. It is further amplified by massive investments in electrification and defence, as well as monetary debasement. In short, for Canada this run might just be the beginning.
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South Korea and some other markets have outperformed Canada, but I’ve narrowed my analysis to the top countries by market cap.
Richard, Richard, Richard… you buried the lede.
The good news is that I largely agree with you…
There is a raw, burning need to put some emphasis on that agreement, however; and to that end I want to note that Canada’s equity outperformance is a function of global commodity scarcity, underinvestment in mining capacity, and macroeconomic uncertainty that favours gold.
It is NOT evidence of domestic productivity improvement, competitiveness gains, or broad‑based economic momentum, or really anything resembling a strong economy.
But will Liberal politicians avoid interpreting equity performance as validation of economic strategy? Of course, because they well know that Canadians are financially illiterate. But the drivers are exogenous.
If the commodity cycle persists, Canada will continue to benefit passively. If it reverses, equity performance will adjust sharply, independent of domestic policy choices... and
with the failure of free trade renewal, the entire logic of Canada’s equity outperformance becomes even more concentrated, even more externally driven, and even more disconnected from domestic economic fundamentals.
The TSX becomes a pure commodity‑cycle asset, not an economy‑linked one, as the economy weakens, and gold strengthens.
So few jobs created ?