When constructing a diversified portfolio, investors commonly compare the Canadian and U.S. equity markets. That’s for good reason. After all, for Canadian investors, putting capital close to home makes sense — many investors use the services of the companies they invest in, and they can better understand domestic companies (and have a comparative advantage in this regard).
Of course, investors who have had a more U.S.-focused portfolio have done much better than those who have stuck to a portfolio comprised of 100% Canadian stocks. However, there are some reasons why staying invested in Canada and potentially ramping up exposure to Canadian stocks may make sense for 2025.
I’m going to dive into the bull case behind why Canadian stocks could actually outperform U.S. stocks in 2025. Here are three key factors I think are worth pointing out for the average investor.
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A resource-driven economy focused on commodities
In general, Canada’s economy is heavy in resources and financials/housing. Many of the largest mining operations call Canada home, with the country’s vast resources fueling much of the growth across North America and the world more broadly.
The fact that Canada’s equities market is uniquely tied to the natural wealth the country provides is not lost on investors. And with certain secular trends such as electrification and a push for cleaner energy ahead, the country’s commodity-heavy index could get a boost if we see the broad global push toward these goals intensify. I think it’s a relatively safe bet to assume that as the global population increases and we require ever-increasing amounts of raw materials, the Canadian market could be positioned for growth over time.
But there’s a defensive element as well to holding many resource-heavy companies in one’s portfolio. If times get tough for tech stocks, for example, investors may look for lower-beta options in the market. As it happens, many of these commodity-focused companies outperform during periods of turmoil, so if that’s your case, the TSX may be a good place to shop for deals right now.
Valuations make sense
On that note, it’s worth pointing out that Canadian stocks have historically traded at lower price-earnings multiples than their U.S. peers. And while Canada may not have the upper echelon of growth stocks (particularly within the tech sector), the U.S. does; the country’s relative valuation advantage could be a key driver of investor interest if value stocks come back into focus during the next part of this cycle.
My base case is that investors will become much more valuation-focused if we start seeing degradation among many of the high-flying tech stocks that have driven the U.S. market in recent years. If that’s the case, Canadian stocks that have been undervalued for a long time could see a bump in investor interest moving forward.
Financials sector remains strong
If we do see some sort of major global recession or at least recessionary forces pick up, Canada’s financial sector has proven to be very resilient during times of crisis in the past. Investors may harken back to the great financial crisis when Canadian banks held relatively steady and provided a relatively safe harbour for investors.
The financial sector accounts for a significant percentage of the Canadian Toronto Stock Exchange (TSX) and is the backbone of the nation’s economy. Unlike the United States, where regional banks were adversely affected in 2023 and 2024 through the surge in interest rates, Canada’s global banks are known for their stability and high regulatory standards.
The “Big Six” Canadian banks, including Royal Bank of Canada and Toronto-Dominion Bank, have always represented reliable earnings and dividend payers. In a year where global economic uncertainties may persist, such banks offer a degree of predictability that tech-heavy U.S. markets may not.
Bottom line
Overall, the structural differences between Canadian and U.S. stock markets set up for potential outperformance by Canadian equities in 2025. Greater exposure to financials and energy/commodities makes Canada’s market more stable and value-oriented than the very tech-heavy indices in the U.S.
Canadian stocks are as attractive for an investor looking to weather potential market turbulence and buy on global trends as they offer growth and resilience. If anything is to be said from this, the year 2025 can be when Canadian equities take the lead.
