Key Takeaways
- Analysts say precious metals stocks led the market’s gains, with strong bank earnings adding to the momentum.
- Canada continues to be a beneficiary of investor diversification away from US tech stocks.
- Geopolitical risks and signs of an overheating US economy could shift the market’s course.
Rising gold prices and global economic uncertainty continue to fuel the Canadian stock market as it notches new all-time highs. Amid an investor pivot to safe-haven assets, analysts say the market momentum continues to be sustained by index-leading gains in materials, as well as solid bank earnings.
The Morningstar Canada Index has risen nearly 2% this week, taking its gains this years past 7% as of Feb 26. The week’s strong showing led the S&P/TSX Composite Index to consecutive record highs on Tuesday, Wednesday, and Thursday, when it closed up 374 points, or 1.1%, at 34,501.96.
“Materials have been the strength for the TSX this week, much of the same story for the past year,” says Brett Gustafson, associate portfolio manager at Purpose Investments. “Gold miners specifically have been rallying. The TSX gold subsector is up over 5% the last three days following some strong earnings reports.”
What Is Fueling the Market?
The current rally is partly due to investors seeking safe havens, including precious metals, amid heightened global uncertainty. “Starting with the materials sector, the stocks of precious metals producers have been driven higher by the rebound in gold and silver prices,” explains Philip Petursson, chief investment strategist at IG Wealth Management.
So far, “just over half of materials companies have reported, and fourth-quarter earnings are up roughly 130% year over year,” says Purpose Investments’ Gustafson. He adds that the gold stock rally this week has been underpinned by strong profitability for miners amid sky-high bullion prices. This is borne out by the fact that the Morningstar Canada Basic Materials Target Market Exposure Index is up more than 27% this year as of Feb. 25.
Most of the recent moves in the market this month have been down to stocks in the materials sector, according to Tiago Figueiredo, macro strategist at Desjardins Capital Markets. “Since the start of February, roughly half of the TSX’s gains have come from the materials sector alone,” he says.
Another key tailwind for the market has been the financials sector, especially as the banks’ earnings season gets underway. With strong quarterly results, Canadian banks have been a big driver of near-term price movements. This week in particular, “about a third of the overall index performance came from financials,” says Figueiredo.
Spurred by the Bank of Canada’s decision to keep its low policy rate unchanged for the near future, easing mortgage renewal fears, “the banks have reported strong earnings and revenue growth across the board, driving valuations higher with an improving outlook,” says IG Wealth’s Petursson.
Market Rotation Tailwinds
Canada is well-positioned to gain from the ongoing rotation among investors out of US tech stocks as fears of an AI bubble and market concentration drive diversification.
“Broadly, investors are becoming more cautious on technology and are rebalancing after being traditionally very overweight,” says Desjardins’ Figueiredo. “I expect that process to continue through the year, which should provide a favorable tailwind for the TSX.” He cautions investors not to expect another 20%-plus year for the index, but he maintains that “the TSX is positioned to outperform the S&P 500 in 2026.”
Echoing that view, Purpose Investment’s Gustafson says the positive flows could continue in Canada, reflecting the general shift of capital away from US equities toward more international exposures. “The TSX has certainly been a beneficiary of that movement, and as we know, for every dollar that goes into the TSX, over 50 cents goes into materials and banks,” he says. He adds that these two sectors last had a similar concentration in the Canadian market was roughly 15 years ago.
Momentum May Wither
Gustafson wants to temper investor expectations for the market’s outperformance. He remains concerned about the possibility that precious metals and financials may not continue to lead. “[The] positive contribution from gold earnings could prove to be fleeting. The recent gyrations certainly support this view,” he says, citing the pullback in gold prices a few weeks ago from all-time highs, which dragged down the TSX.
He says the growth runway for banks is also running out: “Banks are trading very expensive after their 2025 run. This does make it hard to see where returns could be sourced in 2026.”
Risks on the Horizon
The market remains susceptible to certain factors that could put the skids on its current march higher. Gustafson counts “difficult rhetoric leading up to Canada-United States-Mexico Agreement negotiations” as one of the leading threats. Other factors that could derail the market include “gold bullion pulling back, softer bank earnings or a shift in global risk appetite.”
Investors who didn’t take profits after the market’s 2025 outperformance, or whose portfolios are overweight Canadian equities, “could consider trimming into some strength,” Gustafson says, implying it might be prudent to sell a portion of Canadian stocks while the market is doing well.
Desjardins’ Figueiredo says markets appear to be ignoring geopolitical risk: “Iran remains on our radar—particularly the potential for disruptions to global oil supply. The concern is less about Iran’s production capacity and more about interruptions to shipping through the Strait of Hormuz.”
In contrast, IG Wealth’s Petursson isn’t too worried about geopolitical risks upending the market, “because the boy has cried wolf a few times too many.” He’s more concerned about the risk of the US economy running too hot, leading to higher inflation and long-term yields. “That would impact equity valuations in the US, but also in Canada and other areas around the world,” says Petursson. “That could take the wind out of the sails of this rally.” It’s a lower-risk probability, “but one that exists nonetheless.”
