Vanguard says AI adoption and valuations could extend Canada’s edge for years
Canadian stocks are on track to outperform the US market by a wide margin in 2025, fuelled by record gold prices, stronger corporate earnings, and a valuation edge that investors are beginning to notice, reported Bloomberg.
The S&P/TSX Composite Index has climbed more than 16 percent this year, compared with a rise of less than 10 percent for the S&P 500.
Bloomberg data show Canada last surpassed the US by this scale in 2022 and, before that, in 2016, both periods marked by gains in commodities.
Vanguard Group chief economist and head of investment strategy Joe Davis said the rally could extend for the next five to seven years, driven by investors shifting focus as artificial intelligence enters a new phase.
In this stage, he explained, companies that successfully adopt AI will benefit more than the expensive firms that provide it.
“The more bullish you are on AI, the less you would weight technology in your portfolio,” Davis said before a fireside chat hosted by Vanguard in Toronto.
Bloomberg reported that gold miners drove this year’s gains, pushing the materials sector up 52 percent as investors sought haven assets during heightened trade and geopolitical uncertainty.
Financial stocks have also added momentum, with five of Canada’s Big Six banks beating analysts’ third-quarter earnings expectations.
Meanwhile, US equities have faced headwinds.
The so-called ‘Magnificent Seven mega-tech stocks’ rose only 11 percent this year, after advancing 67 percent in 2024 and 107 percent in 2023.
Despite slowing growth, they still trade at about 35 times forward 12-month earnings. By comparison, the S&P 500 overall trades at 25 times, while Canadian stocks are valued at just 18 times.
Davis said this valuation gap underscores the opportunity in Canadian markets. He compared the current cycle to the early 20th century, when electricity adoption transformed automakers like Ford Motor Co. and General Motors Co. by boosting productivity and returns.
“As tech valuations become stretched and investors look past the providers of AI to the undervalued firms that can benefit the most, the tech-heavy S&P 500 will suffer for it,” he said.
Davis added that Canada’s services sector, led by financial firms, is well positioned to capture gains from AI adoption.
“We think this has some legs,” Davis said.
He noted there would be ups and downs but added that if their outlook proves correct, Canada’s outperformance over the US would be by serious percentage points.
