2025 Semi-Annual Market Outlook: Canadian Equities

Canadian banks navigate economic uncertainty with strong provisions. Volatile oil prices and a constructive North American natural gas outlook. Gold shines as a key diversifier, up 22% YTD amid fiscal concerns, inflation, and geopolitical risks.

Canadian Equities Overview

In March, Canada emerged as a central focus in recent U.S. tariff actions, despite being a long-standing ally of the United States. This has strained cross-border sentiment and introduced significant economic uncertainty.

• March 6: The U.S. imposed a 25% tariff on non-USMCA goods (excluding energy and potash at 10%). Canada responded with retaliatory tariffs on $30 billion of U.S. imports.
• March 12: The U.S. applied a 25% tariff on Canadian steel and aluminum.
• March 13: Canada countered with another $30 billion in 25% retaliatory tariffs.

Relief came on April 2, “Liberation Day,” when Canada was excluded from reciprocal tariffs on other countries. While this brought short-term stability for Canada, broader tariff uncertainty still weighs on the outlook. Despite Canada being spared from a reciprocal tariff perspective, markets reacted sharply down on “Liberation day” and the next several days that followed. The S&P/TSX touched a low of 22,506 on April 8 and has since rebounded 17% to 26,233 by May 31, as signs of friendlier tariff discussions have begun to emerge between the U.S. and other countries.

Domestically, the Canadian election on April 28 ushered in a new administration, with Mark Carney elected Prime Minister, leading a minority government. Given how united Canada is on pro-growth policies, there is an excellent opportunity for the Federal government to improve the growth and productivity of Canada’s economy.  

Outlook:

Banks

The banking sector faces headwinds from trade and economic uncertainty. We believe a near-term uptick in credit losses is likely, though Canadian banks appear well-prepared with sufficient provisions. While core banking revenues remain pressured, strength in capital markets and trading has provided a meaningful offset. We expect core revenues to recover gradually, supported by a more pro-growth policy stance. Elevated capital buffers provide resilience, and share buybacks and dividend growth remain viable options for maintaining financial stability. However, we remain cautious in the short term given consumer weakness and ongoing macro uncertainty. Moreover, given the uncertainty related to tariffs, we believe that valuations of Canadian banks (trading roughly in line with historical averages) are not overly attractive. 

Energy

Oil prices are relatively unchanged YTD although they have been extremely volatile. The volatility can be attributed to concerns surrounding slower global demand and rising supply, especially as OPEC+ since April, have now made or announced increases totalling 1.37 million bpd, or 62% of the 2.2 million bpd they aim to add back to the market. Further contributing to volatility is an emerging conflict between Israel and Iran that could result in a material global supply shortage, although OPEC+ has spare capacity that it can bring online as an offset. The largest risk to a supply shortage related to this conflict is if Iran restricts the movement of oil in the Strait of Hormuz. We expect continued volatility in oil prices given the aforementioned factors. We maintain a constructive outlook on North American natural gas, driven by increased LNG takeaway capacity in Canada and the United States. The risk, however, lies in potential oversupply if producers respond too aggressively to expanded LNG capacity.

Gold

Gold has been a top performer, rising 22% year-to-date and crossing $3,300. The TSX Materials sector—driven primarily by gold—has led Canadian market performance, up roughly 25%¹. We believe several factors contributed to this rally: U.S. fiscal concerns, inflationary pressures from tariffs, central bank buying, and ongoing geopolitical risks. In our view, gold remains vital for portfolio diversification. It tends to perform well in risk-off environments and during periods of elevated policy uncertainty. However, it may lag if risk appetite rebounds strongly.

Source: Bloomberg, as of June 18, 2025

We believe volatility is likely to persist in the coming quarters as tariff-related decisions and trade policy remain unresolved. This uncertainty may weigh on business investment and consumer confidence. Simultaneously, Canada faces rising core inflation despite signs of economic weakness, such as higher unemployment, which we think may delay near-term rate cuts. Valuations across Canadian equities have moved above their five-year average, with the TSX trading at 153 times the next 12 months’ (NTM) P/E, compared to a historical average of 14.7 times². While this presents a less attractive entry point at the index level, we continue to identify compelling opportunities through bottom-up stock selection. Our focus remains on businesses that we believe are well-positioned to create long-term value, despite a challenging and fluid macroeconomic backdrop. 

Download the full Empire Life 2025 Market Outlook (PDF). 

¹ Morningstar as of June 1st, 2025
² Morningstar as of June 1st, 2025

This document reflects the views of Empire Life as of the date published. The information in this document is for general information purposes only and is not to be construed as providing legal, tax, financial or professional advice. The Empire Life Insurance Company assumes no responsibility for any reliance on or misuse or omissions of the information contained in this document. Please seek professional advice before making any decisions.

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Information contained in this report has been obtained from third party sources believed to be reliable, but accuracy cannot be guaranteed. Empire Life Investments Inc. is the Portfolio Manager of certain Empire Life segregated funds. Empire Life Investments Inc. is a wholly-owned subsidiary of The Empire Life Insurance Company.

July 2025