Canada’s stock market continued to march upward in the third quarter, as the Morningstar Canada Index continued to outpace the Morningstar US Market Index by a significant lead. Defying a slew of weak macro data, which prompted the Bank of Canada to resume interest rate cuts at its Sept. 17 meeting, the rally highlighted the disconnect between Canada’s economic scorecard and its equity market performance.
The Canada index gained 12.75% in the quarter, outstripping its US counterpart’s 8.20% return. The divergence remains just as pronounced in the year to date, with the Canada Index’s 24.37% rise surpassing the 14.57% increase of its US peer.
Analysts say that this outperformance coming despite the messy rollout of on-again, off-again US tariffs and downbeat economic data makes it particularly remarkable.
The Canadian stock market is not the Canadian economy, and 2025 has followed that view so far, according to Philip Petursson, chief investment strategist at IG Wealth Management. “Despite weaker economic growth and higher unemployment, the S&P/TSX Composite Index has delivered a strong return through the first three quarters of the year,” he says.
What’s Driving Canadian Stock Market Performance?
Analysts point to Canada benefiting from a tailwind created by a combination of factors like low valuations, secular demand for materials and financials, and strong foreign inflows from investors fleeing elevated market volatility south of the border.
More impressively, the returns have been broad-based. “Yes, the outsized gains have come from precious metals miners as gold and silver have extended their run, but contributions to returns have also come from the financials, technology, discretionary, and energy sectors,” says Petursson.
Jack Manley, global market strategist at J.P. Morgan Asset Management, attributes the resilience of Canadian equities this year to the fact that “it’s a very high-quality market,” especially for cyclical exposure.
While US markets are far more diverse and dynamic, they have been roiled by uncertainty stemming from tariffs, fiscal deficit, debt ceiling, and challenges to the US Federal Reserve’s independence. “That difference, combined with the fact that the US political environment and tariffs may have driven some investors to lighten up on their US exposure and reallocate elsewhere, explain some of the outperformance,” says Petursson. It’s also tied to how “the TSX is cheaper on a price/earnings basis, whereas the S&P 500 sits at a historically elevated level.”
The US market’s pronounced fluctuations and frothiness have prompted investors to seek refuge in other geographies, including Canada. “For years, it may have seemed that all eyes were on the US, the S&P 500 index, and the FAANGs, followed by the Magnificent Seven, with valuations continually pushed higher,” says Petursson. “A desire for political stability alongside more attractive valuation opportunities may have finally put the spotlight on the rest of the world.”
Things started to improve in the third quarter. Market volatility on both sides of the border retreated when the trade war’s economic fallout proved more contained than initially feared. This helped restore investor confidence, which in turn drove markets higher, helping Canadian stocks to continue their rise and US stocks to rebound. “Once investors were able to move past the tariff uncertainty, the focus returned to what was important: profits,” says Petursson.
The global economic conditions have been favorable for sustained earnings growth, Petursson adds, citing how “credit conditions continue to ease, the consumer remains healthy, trade is improving, and fiscal and monetary policy remains supportive.”
Leading Contributors to the Canadian Index
Mining stocks’ blockbuster gains this year have made an outsized contribution to the index’s third-quarter gains. Basic materials, the third-largest sector weighting at 14.43% of the Morningstar Canada Index, contributed more than 5.26 percentage points to the index’s overall 12.56% return for the quarter. Financials, the largest sector, a 33.35% weighting of the benchmark, was the second-biggest contributor, making up 3.61 percentage points of the index’s returns. Energy, which makes up 16.16%, contributed 1.95 points, and technology, which accounts for 10.56% of the benchmark, added 1.28 points, both buoyed by secular tailwinds.
Among individual stocks, e-commerce giant Shopify SHOP topped the leading contributors, adding 1.62 points to the index’s gains, followed by Royal Bank of Canada RY with 1.03 points and Canadian gold miner Agnico Eagle Mines AEM with 0.98 points. Another mining major, Barrick Mining ABX, generated 0.81 points, and Bank of Montreal BMO contributed 0.63 points, rounding out the top five.
The Five Sector Laggards
Three sectors that proved to be the laggards on the index’s third-quarter performance scorecard are industrials, which knocked 0.20 points off the index, consumer defensives, which dragged it down by 0.15 points, and healthcare, which detracted 0.01 points. Communication services, which generated a mere 0.12 percentage points, and real estate, with a similarly weak 0.13 points, complete the bottom five sectors.
The five worst-performing stocks were a mixed bag of three industrial names, one financial services stock, and a tech stock. Technology firm Constellation Software CSU registered the dubious distinction of being the worst-performing stock in the index, knocking 0.68 points off its quarterly return. Intact Financial IFC was next, losing 0.21 points. Rounding out the bottom five, Thomson Reuters TRI lost 0.21 points, Canadian National Railway CNR detracted 0.14 points, and Canadian Pacific Kansas City CP detracted 0.11 points.
Pulse Check: Currency and Bond Markets
The Canadian dollar’s sharp rebound this year flipped the script for currency analysts’ forecast for persistent weakness. On the contrary, the loonie has regained strength against the US dollar, driven partially by the depreciation of the latter’s value, dragged down by tariffs and domestic macroeconomic headwinds. As of Oct. 1, the Canadian dollar was trading at C$1.39385, lower than its July peak of C$1.36 but stronger than its lowest yet for the year at C$1.46 in February.
Observers’ 2025 projections had pegged the loonie’s value in the C$1.45-C$1.50 range. They now forecast it finishing the year significantly stronger at around C$1.35-C$1.36 against its US counterpart.
Canadian bond yields have been ticking lower since mid-July across maturities, as markets price in further interest rate cuts by the Bank of Canada. Fund managers say the trend could persist for the foreseeable future against a backdrop of weakening domestic economic data, trade tension, and a slowing US economy.
Government of Canada bond yields have fallen across maturities, now sitting below their levels at the start of the year and substantially below their July peaks. Two-year bond yields, which stood at 2.83% on July 15, fell to 2.47% by Sept. 29. The yield on five-year bonds similarly fell from 3.13% to 2.74%, while 10-year bond yields, which stood at 3.60% in July, dropped to 3.17% by Sept. 29.
Analysts say the yield trajectory suggests that the market is expecting more Bank of Canada interest rate cuts might be on the near-term horizon.
