Economic Stumbles Fail to Shake Investor Confidence in Canada
A buoyant Canadian equities market is signalling an upturn in the economy, in contrast with discouraging economic indicators like GDP growth, interest rates and unemployment levels.
The S&P/TSX Composite Index outperformed its U.S. counterpart, the S&P 500, by a wide margin last year with a gain of 28.7 per cent to the U.S. benchmark’s 17.7 per cent increase.
So far this year, the indices are neck and neck. The S&P/TSX has gained 10.5 per cent in value, to the S&P 500’s gain of 10.8 per cent.
The stock market is a less than perfect proxy for the economy. The rate of food inflation comes closer to measuring the well-being of Canadians during our cost-of-living crisis.
But while grocery prices and rents reflect current conditions, the stock market is, of course, a bet on the future.
That bet is placed collectively by Main Street investors and domestic and offshore institutional investors. And by sovereign wealth funds like Norges Bank Investment Management, the giant Norwegian SWF, which owns stakes in more than 200 Canadian publicly traded companies.
Those investors commit their money to what they believe to be sure things. And the future they see for Canada is an economy with considerable upside potential, or they would have invested their money elsewhere.
At first glance, Canada might seem an odd choice for that investor confidence.
Canada began 2026 in a technical recession. Consumer spending and business investment have since been underwhelming during an unprecedented 18-month trade assault on the Canadian economy by our largest trading partner, a debacle that shows no sign of ending.
The resulting uncertainty should have triggered an investor flight to safety — a shift to fixed-income securities from equities, which are frequent casualties of sudden changes in economic conditions. Instead, equity investors have kept their faith in Canadian stocks.
The allure of U.S. markets is considerable. U.S. economic growth has been strong despite the inflationary impact of tariffs and an oil shock.
And the U.S. equity markets have been propelled to record heights by an artificial intelligence mania. Investors have channelled their exuberance into shares of Apple, Alphabet (Google), Amazon.com and other AI giants.
There are no Canadian equivalents to those investor favourites.
Yet the Canadian stock market was more dynamic than the U.S. last year even as AI mania was lifting the entire U.S. market.
Canadian equities could repeat that performance in 2026 if a widely predicted AI bust comes to pass.
And they could do so even without a bursting of the AI bubble if investors anticipate continued Canadian resilience as the Canada-U.S. trade war drags on.
Investors in Canadian stocks also expect continued growth in Canadian corporate profits.
In May, Statistics Canada reported that operating profit of Canadian corporations in the first quarter of 2026, a time of economic malaise, was $209.9 billion, a 3.4 per cent increase from the same period a year earlier.
And with its abundance of stocks that traditionally pay high dividends, such as banks and utilities, the S&P/TSX ended 2025 with an average dividend yield of three per cent, about twice the S&P 500 average.
After essentially no economic growth between the first quarter of 2025 and the first quarter of 2026, the Bank of Canada forecasts respectable GDP growth of 1.8 per cent in both 2027 and 2028.
It is widely said that investor enthusiasm for Canada’s Big Six banks has driven the market higher — our own version of the U.S. boom in AI stocks.
The Big Six stocks have indeed surged in value this year, by an average of 32 per cent per bank. But the S&P/TSX gains in 2026 have been broadly based.
The double-digit stock market gainers so far this year include shares in transportation (trucking firm TFI International, up 29 per cent year-to-date; Air Canada, up 28 per cent; and Canadian Pacific Kansas City, up 22 per cent).
Higher commodity prices have lifted energy and resource stocks (Suncor Energy, up 50 per cent; Pembina Pipeline, up 28 per cent; Teck Resources, up 27 per cent; and TC Energy, up 22 per cent).
Tech gainers include BlackBerry (up 128 per cent) and Kraken Robotics (up 70 per cent).
Utilities that have done well this year include Atco, up 41 per cent; Boralex, up 41 per cent; and AltaGas, up 32 per cent.
Even industrials, with some of the most direct exposure to U.S. tariffs, have posted impressive gains (Bombardier, up 40 per cent; Magna International, up 28 per cent; and Linamar, up 22 per cent).
Most major impediments to a stronger Canadian economy — the trade war, sluggish economic growth and a labour shortage — are temporary conditions.
“Structural,” or semi-permanent, problems we have, with laggard productivity growth probably topping the list.
But investors in Canadian equities are looking beyond those constraints on growth, certain they will diminish, elevating the value of their investments.
Or, to remind, they would have invested someplace else.
This article was first reported by The Star
