Overview
In our fourth-quarter 2025 review, we reflect on a year that surprised many investors — particularly in Canada — and highlight what continues to matter most for long-term portfolio construction: interest rates, earnings growth, valuations, and disciplined positioning through market cycles.
A Reversal of Fortunes in 2025
Twelve months ago, we suggested that the Canadian equity market could be one of the strongest performers in 2025 — a view that was met with skepticism at the time. Yet the outcome speaks for itself. The S&P/TSX Composite delivered returns approaching 32%, significantly outperforming U.S. markets in Canadian-dollar terms. By comparison, U.S. equities gained roughly 13%, with the NASDAQ up close to 15%, while Europe finished just behind emerging markets as the third-best performing region.
Politics vs. What Markets Actually Care About
Despite a year filled with political noise — including elections in Canada and the United States — markets largely looked past politics. History shows that equity markets care far less about who governs and far more about two fundamental drivers: interest rates and profit growth. Unless political events meaningfully alter those variables in a sudden or disruptive way, their long-term impact on markets is limited.
Interest Rates: Back to “Normal”
From a historical perspective, interest rates remain relatively modest. While rates rose meaningfully from the near-zero environment that followed the Global Financial Crisis, 10-year yields in 2025 remained below long-term averages. Stability — rather than dramatic swings — characterized both 2024 and 2025, creating a more predictable environment for asset pricing and long-term investment decisions.
Importantly, today’s corporate borrowing costs, even at levels above 5%, are not unusual when viewed over a multi-decade lens. What investors fear most is not higher rates, but unexpected rate shocks — something that largely stayed absent in 2025.
Why Canada Performed So Well
The Canadian market’s structure played a central role in its strong performance. Roughly half of the S&P/TSX is concentrated in a small group of companies, including major banks, select financials, resource producers, and a handful of large technology names. When these sectors align — as they did in 2025 — returns can be exceptional.
Gold prices reaching all-time highs boosted mining stocks, while stable interest rates supported bank profitability. After spending years trading sideways in a narrow range, Canadian equities finally broke out, delivering outsized gains once momentum returned.
Markets Move in Phases — Not Straight Lines
Both Canadian and U.S. markets tend to move in long periods of consolidation followed by sharp advances. These phases can be frustrating for investors, but they are a normal feature of market cycles. Breakouts often occur after extended periods of patience, not constant activity.
This reality reinforces our disciplined approach to capital deployment. Volatility is not something to fear, but something to use — provided investors remain patient and selective.
Valuations Are Elevated — But Opportunities Remain
There is little debate that valuations in both Canada and the U.S. are elevated, particularly in technology, which now represents more than 40% of the S&P 500. Strong earnings growth — amplified by artificial intelligence — has justified much of this premium so far. More often than not, high valuations lead to periods of consolidation rather than outright declines.
Crucially, expensive markets still contain opportunities. Leadership rotates not only across sectors but also between growth and defensive companies. These rotations create opportunities for patient investors willing to look beyond headline market multiples.
Key Takeaways from 2025
- Canada delivered an upside surprise.
- Interest rates and earnings mattered more than politics.
- Technology continues to benefit from AI, with discipline required.
- Commodities and industrial metals remain in a multi-year upswing.
- Elevated valuations shift — rather than eliminate — opportunity.
Looking Ahead to 2026
Rather than making bold predictions, we focus on identifying themes and risks. Regionalization of global economies is creating both winners and losers. Valuation dispersion across sectors is increasing. Low-probability, high-impact events — such as interest-rate shocks or currency movements — remain worth respecting.
Our approach remains unchanged: disciplined portfolio construction, selective exposure to long-term growth themes, and careful risk management through changing market environments.
