Canadian stocks set record for records in ‘jaw-dropping’ year

The S&P/TSX Composite rallied sharply in 2025 — up roughly 29% on the year and more than 40% from an April low, hitting 63 new all-time highs — led by a doubling in the materials subindex (gold, silver, copper, palladium) and a 40% gain in financials. Canada’s Big Six banks reported annual adjusted earnings about 2 percentage points ahead of Bloomberg consensus and financials comprise roughly 33% of the index, with the banking subindex P/E rising to nearly 15 from 9.7 in 2022. Fed rate cuts and safe-haven demand supported precious metals while crude oil lagged and remains a drag, leaving valuations and tariff/trade risks as the main near-term cautions for investors considering Canadian equity exposure.

Analysis

Market structure: Winners this cycle are precious-metals miners, materials exporters and select tech (SHOP, CLS) while energy producers and trade-exposed industrials look like losers given weak oil and tariff noise. Bank earnings have benefited from fewer loan provisions and deal fees, but the banking subindex P/E near ~15 (from 9.7 in 2022) signals stretched valuations versus fundamentals. Fed rate-cut expectations (market pricing ~2 cuts in 2026) underpin non-yielding assets (gold) and compress bond yields, supporting miners and ETFs tied to precious metals while reducing near-term USD safe-haven bids and pressuring CAD versus commodity sensitivity.

Risk assessment: Tail risks include (1) a surprise Fed pause/ hawkish pivot that keeps real yields higher and collapses gold (high-impact low-probability), (2) renewed US trade measures or Canada-specific sanctions that hit bank loan books and cross-border flows, and (3) a mining disruption that temporarily spikes miner prices then reverses profit-taking. Immediate horizon (days): expect profit-taking and volatility ahead of Fed minutes; short-term (1–6 months): metal prices will track rate-sentiment and geopolitical headlines; long-term (6–24 months): bank credit performance will reveal whether elevated valuations are justified.

Trade implications: Tactical overweight miners/materials via GDX or Canada-focused gold-miner ETFs for a 3–12 month horizon (target 20–35% upside if gold holds above a 50-day MA), while trimming Canadian bank exposure — sell or reduce BMO weight by 25–40% into strength. Use pair trades: long gold-miners (GDX or XGD.TO) vs short XFN.TO (Canadian financials ETF) to isolate metal upside from bank cyclicality. Options: buy 3–9 month gold-miner call spreads or 6-month GLD call+put collars to capture upside with defined risk; sell covered calls on remaining BMO holdings to harvest premium.

Contrarian angles: Consensus underestimates the dependency of Canadian banks on a stable CAD/oil; a prolonged oil slump (20%+ from current) could compress bank margins and trigger multiple contraction. The market may be overpaying for bank stability — if gold corrects >15% or real yields rise 50–75bps, miners and the TSX could retrace rapidly. Historical parallel: 2009 commodity-led rebounds reversed when liquidity cycles tightened; set explicit re-entry/stop thresholds (e.g., gold < $1,900 or bank P/E reverts to ≤12) before increasing risk exposure.

Key Decisions for Investors

• Establish a 2–3% portfolio long in GDX (or Canada-focused gold-miner ETF XGD.TO) over the next 2 weeks, add another 1% if spot gold holds above its 50-day MA for 5 consecutive trading days; target 3–12 month hold with a stop-loss if gold declines >15% from entry.
• Reduce BMO (BMO.TO / BMO US ADR) exposure by 25–40% within 30 days; redeploy proceeds into miners/precious-metal plays. If BMO P/E contracts to ≤12 or 12-month loan-loss provisions rise by >20% YoY, consider re-accumulating up to prior weight.
• Implement a pair trade: go long GDX (2% allocation) and short XFN.TO (1.5% allocation) to capture relative upside in metals vs Canadian financials over 3–9 months; rebalance if the spread widens/narrows by >15%.
• Buy 6–9 month call spreads on SHOP (e.g., delta ~0.35–0.45 strikes) sized to 1–2% of portfolio for asymmetric upside; for CLS, consider a 3–6 month buy-write or small long-dated (LEAP) call to capture hardware cycle recovery while limiting capital at risk.