Key Takeaways
- The Canadian stock market is set to climb, but at a relatively slower pace.
- Energy will remain a key force behind the market’s rise amid geopolitical turmoil, but sustained oil prices could become a drag.
- Basic materials could lend further support to the market’s rise.
After a year of big gains, Canadian energy and resource stocks could continue to drive the stock market higher, but analysts expect gains to be more modest. Higher oil prices, demand for commodities like gold, and strong bank earnings are expected to underpin the market’s advance in the foreseeable future, according to analysts. This dynamic is key to the Canadian stock market outlook, with energy, basic materials, and financials combining to make up 70% of the Morningstar Canada Index.
However, analysts warn that prolonged high energy prices do have a risk if they could reignite broader inflation, prompting the Bank of Canada to raise interest rates. That could in turn pressure housing, slow consumer spending, and squeeze bank profits through a higher cost of borrowing.
“Our base case is for modest further gains from here, but the easy money has been made,” says Ben Jang, portfolio manager and investment strategist at Nicola Wealth.
Energy Takes Over from Resources as the Lead Market Driver
Canada’s stock market hit historic highs in 2025, with the Canada Index racking up nearly 30% gains for the year. The momentum has continued in 2026, despite elevated volatility, with the index up more than 7% in the year to date through May 1.
A surge in gold prices, which rose nearly 65% in 2025 and another 5% so far this year, boosted basic materials stocks. The sector rose more than 102% in 2025, and it’s gained nearly 4% since the beginning of this year. During that period, Agnico Eagle Mines AEM gained 107%, becoming one of the three most overvalued stocks in Morningstar’s Canada coverage. Barrick Mining ABX has soared 97%, and Kinross Gold K has added 57%, also landing among the most overvalued stocks.
On the energy front, Brent crude prices have jumped roughly 83%, driven by the Iran war, propelling the sector up 31%. Those gains were led by names such as Suncor Energy SU and Canadian Natural Resources CNQ. For the same period, the financial sector ranks as the second-best performer, up nearly 9%, supported by strong profits for Canadian banks, including TD Bank TD and CIBC CM.
Energy to Provide Fuel for the Market
The war in the Middle East and the global energy disruption continue to create tailwinds for domestic energy stocks, which benefit from higher oil prices, according to analysts. The sector will continue to be one of the key engines for the market, explains Raghav Mehta, vice president, ETF strategist at Global X Canada. He says energy stocks remain attractive, as higher crude prices are expected to boost profits and support share buybacks and dividends.
Mark Rutherford, co-manager of the C$4 billion Mawer Canadian Equity Fund, says energy stocks are also poised to benefit from government support. The federal government recently launched a C$25 billion sovereign wealth fund to invest in major Canadian industrial projects, including oil and gas development. “Geopolitical events may serve to further catalyze policymakers to recognize the importance of energy security and reducing barriers to investment in Canada,” he says.
Beyond short-term tailwinds, such as the war-driven spike in oil prices, some analysts point to the improving financial strength of energy companies to justify their continued exposure to the sector. “Canadian integrated energy producers have used the last two years to repair balance sheets and return capital, not chase production growth,” says Nicola Wealth’s Jang. “What’s different this cycle is the [financial] discipline. These companies are generating strong free cash flow. We like the underlying businesses, not just the commodity exposure.”
Analysts identify basic materials as another pillar of market strength. Within that sector, the outlook remains particularly optimistic for gold stocks. Gold could continue to attract investor demand, both for its ability to protect against volatility and its potential as a long-term investment, says Global X’s Mehta. “With geopolitical risks and tariff noise still elevated, gold is doing double duty as a portfolio hedge and a performance contributor, especially when bond yields remain higher and range-bound,” he says.
The Canada-US Trade Talks Wildcard
Beyond the Iran war-driven oil shock, Canada remains exposed to the outcome of upcoming talks over the renewal of the Canada-United Sates-Mexico Agreement, the continental free-trade treaty. A favorable outcome could support export-driven sectors, according to Nicola Wealth’s Jang. “A resolution or even partial tariff relief on steel and aluminum would be a meaningful catalyst for industrials and the Canadian dollar,” he says.
That said, due to the unpredictability of trade negotiations, Jang maintains a flexible approach to portfolio construction by holding “balanced positions.” This lets him position proactively for anticipated outcomes while remaining responsive to how the talks evolve.
Global X’s Mehta sees further opportunity for financials and domestically focused cyclicals stocks, including those in the real estate, telecom, and consumer discretionary sectors. “If the [trade treaty] review produces even partial clarity or de-escalation, there is room for a relief rally in [these stocks] that have been trading under a policy overhang,” he says.
A less favorable trade deal could create headwinds for some sectors of the market. “The CUSMA review is the most consequential known risk on the Canadian equity calendar right now, and the market isn’t fully pricing it,” cautions Jang. He identifies autos, lumber, and steel as the sectors most vulnerable to the outcome of the trade agreement, saying they’ll “have elevated volatility until there’s more clarity.”
The Risk of Higher Oil Prices
Higher oil prices support the Canadian market, thanks to energy’s nearly 19% weighting in the Canada Index. But Colin White, portfolio manager and president/CEO at Verecan Capital Management, warns that if they remain too high for too long, that structural advantage could turn into a drag.
Notably, at the Bank of Canada’s recent meeting, Governor Tiff Macklem signaled that if energy inflation spills into the broader economy, multiple interest rate hikes may become necessary.
Global X’s Mehta says if higher oil prices feed into inflation, it could crimp consumer spending. In such a scenario, some investors might want to rotate into defensive sectors like “utilities, telecom, insurance, and selective staples, [which] are expected to stabilize portfolio volatility.”
What’s Next for the Canadian Stock Market?
Verecan Capital’s White says Canadian stocks could offer mid-to-high-single-digit returns through the year-end, although “for this to happen for the TSX, materials and gold will have to remain strong, but without excessive volatility.”
Global X’s Mehta says the S&P/TSX Composite Index should finish higher by year-end, but “the ride up could be a bumpier upside, driven by ongoing macro noise and volatility and not a straight-line rally.” He forecasts that the index will finish the year in the 34,900-36,000 range, implying an additional 4%-7% gain from its current 33,566, as of May 5.
“Canada’s market is still being supported by a mix of natural resource leadership, resilient domestic lenders (the Big 6 Canadian banks), and a relatively modest valuation premium, while the TSX remains less expensive than the S&P 500 on a relative basis,” Mehta says.
