Canadian equities set to grow in 2025, but at slower pace as political turmoil swirls

The TMX Market Centre is shown in Toronto, Wednesday, Sept. 11, 2024. THE CANADIAN PRESS/Paige Taylor White

The Canadian equity market will continue building on its strength from 2024 despite lingering political uncertainties, experts forecast. But investors should prepare for more volatility and be patient as the pace of gains is expected to be a bit slower.

There's a strong mandate for the current bull market to continue in the new year despite tariff threats from the U.S. and political uncertainties in Canada, said Angelo Kourkafas, senior investment strategist at Edward Jones.

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"When we take a step back and look at the foundation ... it is ongoing economic growth," Kourkafas said. "It is rising corporate profits and the outlook for lower interest rates at a gradual pace and all these things will remain in place for 2025."

The S&P/TSX composite index hit record heights in 2024 and ended 18 per cent higher for the year.

Kourkafas predicts the uptick will continue for another year "but likely, we are going to see volatility increase and the pace of gains slow."

A few risks could overshadow the pace of growth of the Canadian index in 2025.

Kourkafas said the ongoing tariff threats from Donald Trump could hurt business investments.

The over-valuation of certain tech stocks in the U.S. market also poses a threat to markets, Kourkafas said.

"There's a lot of enthusiasm around artificial intelligence but valuations are a bit stretched," he said.

Despite that, many analysts believe the TSX has a solid foundation underpinning its consistent growth.

Rising corporate profits and earnings across the board as well as lower interest rates from the Bank of Canada will "help drive the equity market toward a new record," said Brianne Gardner, senior wealth manager of Velocity Investment Partners at Raymond James Ltd.

The TSX is projected to have growth supported by strong commodity prices, especially in the energy and materials sectors, which are set to rebound in 2025, she said.

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The federal government recently increased its investments in Canadian infrastructure in an effort to increase the number of homes in the coming years, which could help to revive the materials sector on the index.

A weaker Canadian dollar could also work in favour of the equities market, attracting more foreign investment to Canada, Gardner said.

The Canadian financial sector has maintained a solid performance and is expected to get a moderate boost from upcoming mortgage renewals, setting the sector up for further profitability, she said.

Further interest rate cuts, although slimmer than those seen in 2024, will also push the equity market up, Gardner said, "which is why we do expect more upside from here."

Kourkafas said a resilient consumer, softening inflation levels and rising wages are also working in favour of the Canadian index — increasing consumer and business confidence.

"We know there's a very strong relationship between the TSX and corporate profits," Kourkafas said. "After a year where TSX earnings were fairly muted ... we're looking at the acceleration in 2025 to potentially double-digit growth."

Kourkafas anticipates 10 to 12 per cent earnings growth on average in 2025, which will push the TSX higher.

Despite all the cards in its favour, the TSX is expected to underperform this year when stacked against the S&P 500.

Kourkafas said while the gap between the two indexes will narrow, the TSX will grow at a slower pace — matching Canada's slower economic momentum ahead of trade and export uncertainties.

Gardner agreed. But she added the TSX could perform better in the second half of the year as interest rates in Canada continue to come down, boosting consumer spending.

"But until we get down to those levels, I think the U.S. stock market is going to continue to lead us strong through 2025, especially with Trump in office and pro-business (policies)," she said.

Brian Madden, chief investment officer with First Avenue Investment Counsel, said it is "extremely important" to have a diversified portfolio in 2025.

Madden, who has clients investing in both public and private markets, said the benchmarked equity mandate for his fund remains 50-50 for investments in the U.S. and Canada. This hasn't changed in the last couple of quarters, he said.

"It's not that you need to pick one versus the other," he said. "It's just that you need to pick the opportunities wherever you find them."

He suggested being an active investor — picking stocks that are mispriced or undervalued rather than continuously falling back on the so-called Magnificent Seven — could be imperative to growth in the coming years.

Diversifying asset class by geography could also help with growth, Madden added.

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If investors are concerned about tariffs becoming a reality, Madden suggested investing in industries that are likely to escape tariffs, such as the service sector — which also happens to be the country's biggest sector.

"Another way to mitigate the risk is to own companies where they have pricing power, where they can pass on the cost of the tariff without suffering major loss of market share," he said.

Madden said diversifying a portfolio will make it robust to "different kinds of market conditions and the inevitable setbacks and corrections that you see from time to time."

This report by The Canadian Press was first published Jan. 5, 2025.