Key Takeaways
- The stock market closed a turbulent quarter solidly in the green, overcoming geopolitical tensions and persistent energy inflation, analysts say.
- Energy and basic materials led the gains, while tech and financial services were notable drags.
- Despite a decline, Canadian stocks significantly outpaced their US counterparts for the quarter.
The Canadian stock market weathered a volatile quarter to finish with gains, even amid the impacts of the Iran war. The Morningstar Canada Index rose 3.8% in the first three months of 2026, significantly outperforming US stocks’ 4.0% decline.
Canadian stocks started the year strong, up almost 10% near the end of February. But when the Iran war broke out on Feb. 28, the market fell, dipping briefly into the red midway through March before ending the quarter back in the green. What kept the Canadian stock market resilient was its unique sector composition, particularly its heavy weightings in energy and materials stocks.
That said, financial stocks suffered amid rising bond yields and a loss of momentum in the Canadian dollar relative to the greenback. That’s not to mention growing investor concerns around AI undercutting revenue and business models, which have led to first-quarter losses for software stocks (alongside a wide range of other industries).
From here, the Canadian stock market’s performance will depend on how long the war lasts and what it means for oil prices and economic growth, says Philip Petursson, chief investment strategist at IG Wealth Management. “If the war ends and economic momentum picks up from where it left off before the war, then the cyclically sensitive sectors such as industrials should benefit,” he says. “Should the war continue, then other defensive sectors beyond energy and utilities, including communications and staples, should benefit in a flight to safety and quality.”
Canada’s Sector Weightings Drive Market Outperformance
The Canadian stock market’s sector composition underpinned its resilience during a volatile quarter in which many of its global peers ended in losses. The Canada Index’s heavy tilt toward energy and basic materials proved beneficial, as strong gains in these sectors provided ballast against losses suffered by technology (the worst performer) and financial services (which make up roughly a third of the index).
Stocks That Led Canadian Market Gains in Q1
Among individual stocks, oil and natural gas producer Canadian Natural Resources CNQ made the largest contribution, adding 1.02 percentage points to the Canada Index’s overall quarterly gain of 3.78%. The stock represents 2.51% of the index.
Next was the integrated energy company Suncor SU. With 1.98% weighting in the index, it added 0.87 percentage points to the index’s quarterly gains. Gold miner Agnico Eagle AEM and energy players Enbridge ENB and Cenovus CVE also contributed to the Canadian stock market’s gains.
Stocks That Dragged Down the Market in Q1
The stocks that detracted most from the Morningstar Canada Index came from a mixed bag of technology, financial services, and consumer defensive companies.
Software application leader Shopify SHOP fell 26.3% in the quarter. The Canada Index’s third-largest holding, its heavy 4.5% weighting dragged down overall returns. Constellation Software CSU was the second-most-impactful detractor, followed by investment management firm Brookfield BN. Royal Bank of Canada RY, the largest stock in the index with a whopping 6.9%, contributed to the losses even as it fell just 3.2%. Discount-store Dollarama DOL rounded out the five worst-performing stocks with a loss of 16.7%.
Jack Manley, global market strategist at JP Morgan Asset Management, says that higher yields, sparked by fears of rising inflation, drove financial stocks down. “Higher yields have pressured financials, which are now the second-biggest detractor in the index,” he notes. “With the Canadian consumer highly sensitive to higher interest rates and net interest margins not set to widen as much as initially anticipated, banks in particular are at risk of modestly higher defaults and softer margins.”
Rising Bond Yields
Government of Canada bond yields had been ticking lower across maturities to start the year as the Bank of Canada held interest rates steady. But the onset of the Iran war and the consequent oil shock reignited fears of inflation. This caused yields to spike as markets started to price in multiple rate hikes from the central bank.
Government of Canada two-year bond yields rose to 2.82% from 2.39% since the war started. The yield on five-year bonds similarly soared to 3.05% from 2.67%, while 10-year bonds jumped to 3.46% from 3.13% as of March 30.
The Loonie Loses Momentum
The Canadian dollar experienced a loss of momentum against the US dollar during the first quarter, marking another reversal from 2025. The loonie started the year at C$1.37 against the US dollar, reaching its quarterly peak of C$1.35 around mid-February. Then it got caught in the Iran war downdraft, ending the quarter at C$1.39 as the US dollar rebounded as a safe haven and the prospects of a US Federal Reserve rate cut faded.
The Canadian dollar could face continued headwinds as the Middle East conflict drags on, as central banks on both sides of the US-Canada border hold rates and the fate of the continental free-trade treaty remains uncertain.
