Key Takeaways
- Canadian stocks rose twice as much as the US stock market in 2025.
- The materials sector led the market.
- Bank of Canada interest rate cuts boosted bank profits, fueling financials.
The Canadian stock market closed lower on Tuesday. Still, the downdraft remained contained despite widespread geopolitical uncertainty that rattled markets south of the border and across the globe.
The S&P/TSX Composite Index closed in the red, down 1% at 32,750.28, as a fresh surge in gold prices drove mining stocks higher, providing a cushion from the broader market retreat.
The Canadian market held up well even as the S&P 500 Index suffered a 2% drop (its worst day since October), as US President Donald Trump’s tariff threat over Greenland spooked investors.
The Canadian dollar treaded water, holding steady at C$1.38, or 0.72 US cents, against the US dollar.
The Canadian stock market saw outsized gains and eclipsed its US counterpart in 2025. The composition of Canada’s stock market, which is dominated by the financial, basic materials, and energy sectors, underpinned its strong showing. Tailwinds for these sectors included a flight into gold, a supportive central bank, rising oil and gas prices, and expanded earnings multiples. Currency moves strengthened relative returns for Canadian stocks while a rotation away from the US stock market took place.
The Morningstar Canada Index soared over 29% in 2025 through Dec. 19, outpacing the Morningstar US Market Index’s 15% return. The divergence remains just as pronounced in the S&P/TSX Composite Index’s 32% gain, compared with the S&P 500’s 14% return so far in 2025.
“The TSX’s standout performance this year was less about one-off surprises and more about the index’s core exposures lining up with 2025’s macro environment,” says Tiago Figueiredo, macro strategist at Desjardins Capital Markets.
Sector Tailwinds Propelled the Canadian Market’s Record Run
All three of the sectors comprising the Canadian stock market’s main engine—financials (32% of the index), materials (17%), and energy (15%)—were helped along by tailwinds in 2025.
The biggest winner was the basic materials sector, which rose more than 88% in 2025 through Dec. 19, as measured by the Morningstar Canada Basic Materials Target Market Exposure index. Unrelenting economic uncertainty for much of the year triggered a rush into gold as nervous investors sought refuge in safe haven assets. This drove prices of the yellow metal to record highs as gold futures rose over 70% over the year, creating a strong tailwind for the sector. Materials stocks also benefited from rising prices for copper and other critical minerals “as investors sought hedges against geopolitical and inflation risks,” explains Ashish Dewan, investment strategist at Vanguard Canada.
The financial sector—with gains of nearly 31% in 2025 through Dec. 19, according to its Morningstar Index—was the second-best-performing sector. “Banks managed the feared mortgage renewal cycle far better than expected, helped along by the Bank of Canada’s early and aggressive easing,” says Desjardins’ Figueiredo. The easing of that housing market tail risk “set the sector up with a clearer runway into 2026 and even 2027, when payment shocks are expected to flip from a drag to a mild economic tailwind.”
The Bank of Canada cut interest rates by a full percentage point in 2025, which helped fatten profits for financial companies by lowering borrowing costs and improving liquidity. The easing cycle, which started in the summer of 2024, “acted as a tailwind for financials and other rate-sensitive sectors,” says Dewan.
Energy completed the triad of top performers. The third-largest weighting in the Morningstar Canada Index, the energy sector, grew at a steady clip of about 10% through Dec. 19, contributing to the market’s outsized annual gains. “Energy outperformed on the back of resilient global demand and higher oil and natural gas prices,” says Dewan.
The energy sector’s performance was also a function of government policy. “The Trans Mountain Expansion enhanced realized prices for Canadian producers, improving margins and cash flows,” Dewan explains. “Additionally, federal initiatives like Clean Economy Investment Tax Credits spurred capital flows into energy projects.”
Valuations Mattered In 2025
While not the whole story, relative valuations were important accelerants for Canadian stocks. “It’s fair to say that US valuations are higher than Canada predominately because of the US technology sector and AI-related names,” says Sadiq Adatia, chief investment officer at BMO Global Asset Management.
Multiple expansion (when a rally results from stock prices going up faster than earnings growth) served as a key driver of TSX returns. Notably, while the valuation of Canadian stocks rose throughout the year, US equities, which started 2025 at stretched levels, extended those valuations even further over the period.
Nicola Wealth portfolio manager Ben Jang says the valuation gap can be viewed most clearly through yields. “Strategists have highlighted that the TSX’s dividend yield sits around 3% versus roughly half that for the S&P 500, which makes Canada look comparatively compelling when investors are seeking carry [regular income], defensiveness, and a different factor profile [market characteristics],” he says.
Currency Movements Boosted Relative Returns
“The US dollar weakened against the Canadian dollar, but more against other currencies,” says BMO’s Adatia. “This provided another tailwind to the TSX returns.” However, Canadian investors who held USD-denominated stocks saw their returns getting squeezed due to US dollar depreciation. “Canada looked much better when you take the currency into consideration,” says Adatia. He says that next year, the interest-rate paths of the two central banks may play a bigger role in the currency-adjusted returns.
The Canadian dollar started the year trading at C$1.44 against the US dollar, but it fell to C$1.46 in February 2025, its weakest point this year. However, the loonie has since rebounded and was trading at C$1.37, as of Dec. 22—a nearly 5% gain against the greenback.
A Rotation Out of US Markets
Another underappreciated force was the global rotation out of the United States into markets offering better value, less overconcentration, and more diversified sources of return. “Canada was a key beneficiary of [this shift], and interestingly, domestic investors themselves appear to be leaning back into Canadian equities,” says Desjardins’ Figueiredo.
The trend may be a manifestation of a deeper trend. “Global markets are becoming less synchronized as major economies increasingly prioritize domestic policy,” he says. “So not only are investors now getting better absolute returns, but they are also getting diversification benefits from lower correlations across equities outside of the US.”
Analysts concede that historical returns do not guarantee future outcomes, but they maintain that the Canadian stock market’s 2025 outperformance wasn’t a flash in the pan. “[The strong performance] reflected real shifts in policy, valuation, sector dynamics, and global capital flows,” Figueiredo says. “While no market leads forever, the TSX enters 2026 with meaningful tailwinds and a more balanced foundation than the US, and that keeps the case for continued relative strength very much alive.”
