Nearing the end of a strong year, what’s next for the TSX?

The TSX 60 continues to outperform the S&P 500 in 2025. Should the trend hold, this would be the first year since 2016 when the Canadian equity benchmark outperformed its US equivalent over a 12-month period when both were positive. For Canadian advisors, the performance we’ve seen on the TSX has been a boon for clients’ domestic allocations, but it comes with a host of new problems, from emerging areas of concentration risk, to exposure to an underlying shaky economy, to the fear of valuations rising too high.

BeiChen Lin is aware of all these risks and concerns, but remains broadly constructive on Canadian equities. The Senior Investment Strategist and Head of Canadian Strategy at Russell Investments explained how issues like valuation and concentration might come up for clients now in a way they might not have last year. However, he explained that by looking at market fundamentals and the outlook for earnings growth among TSX-listed companies, the picture still appears bright, even despite some wobbles induced by a gold price shock more recently.

“Even with the run-up in the material sector, the largest weight in the TSX continues to be financials and energy. One of the strong points, in my opinion, of the Canadian financial sector is that it is very well capitalized. OSFI sets a minimum capital requirement for the large six banks. That's currently at 11.5 per cent. The average capitalization ratio across those large six banks right now is 13.6 per cent, which is basically two percentage points above that regulatory floor. And I think that's one of the reasons, why even amidst this environment of significant macro headwinds for Canada, five out of the six large Canadian banks were able to beat earnings expectations and have less credit loss provisions than what people were expecting,” Lin says. “I'd say the concentration story is a little bit different in the U.S., where in the U.S. it is more concentrated on some of the growthier names, whereas in Canada, some of that concentration is more on the mature and stable names.”

The one area that Lin highlights as experiencing some concentration risk is Canadian tech, where Shopify plays a significant and outsized role. Only in that respect does he see any mirroring with the concentration issues now found in US markets. Outside of tech, he believes Canada remains largely insulated from those risks.

Materials have grown on Canadian markets this year, especially gold miners who benefitted from the significant price appreciation of gold. While gold prices have pulled back slightly more recently, causing a slight decline in Canadian equity markets, Lin highlighted the fact that price volatility is inherent in many commodities and that gold continues to rest around $4,000 (USD) per ounce. The underlying tailwind for gold of global central banks buying more bullion remains intact, as does the textbook investor behaviour of relying on the metal in periods of global economic and geopolitical uncertainty.

If the gold price appreciation we’ve seen for much of the past few years does slow down, Lin expects there may be some winners and losers among the gold miners on the TSX. In that environment he believes active management carries a great deal of weight, where gold mining names can be selected on the basis of underlying reserves and financial strength.

Widening out to look at the whole Canadian market again, Lin believes that despite growth valuations on a forward price/earnings basis look relatively sustainable. He contrasts the TSX with the S&P 500, saying that the Canadian index trades at a double-digit discount, despite outperformance so far this year. Moreover, he expects earnings growth in the US to slow over the next year while earnings in much of the rest of the world start to catch up. That macro shift should be to Canada’s benefit.

Within the broad Canadian market, Lin says that his team tends to focus on individual security selection rather than sector weights. However, he notes that his team does show some favour for financials, due to their strong capitalization and capacity for earnings beats, and real estate. Despite the headwinds facing certain segments of Canadian real estate, Lin notes that the Bank of Canada has been a world leader in this rate cutting cycle, which offers a tailwind for the sector. Moreover, the return to office mandates now set by the banks should help drive demand for an office sector that’s been beleaguered since COVID.

For Canadian advisors taking on Lin’s view, the issue of underlying economic weakness may be something they need to address with clients. In the face of those risks, Lin stresses the unique composition of the TSX and the potential long-term benefits that come with new efforts to strengthen Canada’s economy.

“Canada, from a macroeconomic perspective, may still face more bumps ahead,” Lin says. “But as we look ahead to 2026, when I think about the fact that there is still that relative valuation gap between US and Canada, I think it does provide a meaningful enough offset to the cyclical risks in Canada. And so I continue to think that investors should have that diversification across both Canada and the US within their portfolios.”