US President Donald’s Trump’s trade war may pose a significant threat to the Canadian economy, but you’d have a hard time telling from the stock market. While the Morningstar Canada Index has fallen from its highs set at the end of January, it’s only off by 4%, and it’s still narrowly up so far in 2025. From 12 months ago, the Canadian stock market is up 22%. Meanwhile, the Morningstar US Market Index is down 4.5% in 2025 and up 10.0% from a year ago.
Given the vulnerability of the Canadian economy to Trump’s tariffs, the buoyancy of its stock market might come as a surprise. However, the defensive asset mix of the Canadian equity market, its limited exposure to the frothy tech sector, and its monetary policy support coalesced to counteract downward pressure on the index.
The Drivers of the Canadian Market’s Resilience
Strategists identify multiple factors responsible for the Canadian stock market’s strength. For one, Nicola Wealth portfolio manager Ben Jang says it boasts attractive valuations. As of March 20, the Canada Index was trading at approximately 15 times forward earnings, while the US Market index was trading at around 22 times, making Canadian stocks about 28% cheaper than their US counterparts.
While tariff tensions have weighed on indexes on both sides of the border, the downdraft was considerably more pronounced in the United States than in the north. “So far, the selloff [in Canada] has been relatively orderly, focused on high-valuation and high-beta names and stocks that had strong momentum, particularly in the AI space,” Jang says.
While names that would be significantly impacted by tariffs have sold off, they have proved more resilient than expected. “This is likely due to a continued belief that there will be a quick resolution to a trade war,” Jang explains. He points to Trump’s first term, when tariffs were used as a transactional tool to negotiate other US government concerns. However, he warns that this time, Trump’s protectionism could potentially lead to longer- lasting tariffs—a risk the market is not pricing in.
CIBC managing director Ian de Verteuil says the secret to the Canadian equity markets’ resilience lies in its defensive asset mix: “Over 50% of the current [S&P/TSX Composite] Index weight is in defensive sectors, such as financials, pipelines, communications, consumer staples, and utilities.”
AGF portfolio manager Stephen Duench thinks this quality may be underappreciated. “If you stack more defensive, and lower beta areas of the market such as regulated utilities, telecommunications, grocers (including Dollarama), and pipelines, they make up a good portion of the S&P/TSX Composite Index,” he says. He points out that the Canadian market’s exposure to such lower-risk sectors far exceeds that of other major markets globally. The combined weightings of these defensive sectors account for nearly 25% of Canada’s primary benchmark.
Moreover, Canada’s main index has benefitted during these uncertain times from its lower exposure to technology (about 10% of the index versus over 30% in the case of S&P 500) and other growth-focused stocks. Duench says these sectors were hit hardest in the selloff, as investors took profits and pared their exposure to more volatile segments.
Some analysts attribute the market’s recent outperformance to attractive valuations compared with Wall Street. “After years of the S&P/TSX underperforming the S&P 500, Canadian equities are trading at a very reasonable 15 times forward price/earnings,” de Verteuil observes.
David Doyle, head of economics at Macquarie Group, says the Canadian dollar’s depreciation also played a role. “A hefty portion of revenues come from outside of Canada,” he says. “This means the weaker Canadian dollar provides a boost to profits for several companies.”
Further, the recent runup in the basic materials sector, which makes up 12.33% of the Canada Index, played a key role in the benchmark’s year-to-date growth. The sector has delivered an impressive 23% return this year, contributing 2.36% to the index’s overall gains, according to Morningstar data.
Doyle says much of the heavy lifting has been done by gold miners, boosted by the recent rally in gold prices. This is further borne out by the fact that the sector’s top holding, gold miner Agnico Eagle AEM, was alone responsible for 0.57% of the index’s total gains. The prices of the precious metal have been on a tear this year, rising 13.6% so far as it sets a new all-time high of USD 3,000 per ounce. Goldman Sachs forecasts gold to climb further to USD 3,100 by year-end.
The Bank of Canada’s Impact on Market Stability
A supportive central bank monetary policy helped in no small measure. “The Bank of Canada has been cutting rates,” notes Doyle, implying that lower interest rates tend to push investors towards equities rather than low-yielding bonds, driving market gains.
The central bank has been easing monetary policy since last June. It has delivered seven consecutive cuts, including two so far this year, in a bid to stimulate economic growth and stabilize the markets.
“The Bank of Canada will likely be sensitive to economic slowdown concerns and look to [continue to] cut rates,” says T. Rowe Price portfolio specialist Matthew Ko.
As last year’s multiple interest rate cuts percolated through the economy, they helped shore up markets and investor sentiment. However, de Verteuil cautions that “monetary policy is a blunt instrument and takes time to work its way through the economy, [whereas] trade disruptions are reflected in financial markets immediately.”
Trump’s aggressive threats of large tariffs, accompanied by messy rollouts and the suspension of those levies, have considerably muddied the policy waters. There is no historical precedent for such actions, and no playbook the Bank of Canada can borrow from. “The complexity of [this] trade war makes it even more difficult for the Bank of Canada to navigate this environment,” de Verteuil says.
Tariffs and Politics: Clouds on the Horizon
Jang observes that the threat of punitive tariffs has eroded sentiment, impacting businesses investments and consumers spending. There are fears that a trade war with the US would push Canada into a full-blown recession. However, Ko says the fact Canadian stocks are still trading at a small premium to their historical averages could indicate hope for a resolution.
Trump has paused some tariffs until April 2, but the trade war is far from over. Levies on lumber, dairy, steel, and aluminum were only the opening salvo, according to de Verteuil. “These tariffs are unlikely to be unilaterally removed anytime soon, and we should expect further threats and even more tariffs,” he warns. A drawn-out trade war would have devastating consequences for the Canadian economy and further fuel market volatility.
The industrial, consumer, and energy-producing sectors of Canada’s stock market have the highest exposure to tariffs. Duench says while a reasonable level of negativity is already accounted for, “the absolute worst-case scenarios are never fully priced in.”
Doyle says the lingering political uncertainty could also dampen investor sentiment. “Any minority government would likely be short-lived and potentially cause Canada to go back to the polls within the next 12 months,” fueling uncertainty and stoking market volatility," he says.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
