As of this writing, the U.S.’s famous S&P 500 stock market index was at 5,942.47, down just 2.43% from its all-time high of 6,090.27, set on December 6, 2024. Not only is the S&P 500 at an all-time high level, but it is also arguably approaching an all-time high valuation. At today’s level, the index trades at 29.67 times earnings, according to GuruFocus. It also trades at a high book value ratio.
By contrast, the S&P/TSX Composite Index is relatively cheap. Trading at 21 times trailing earnings, 16.5 times estimated forward earnings, and two times book value, it does not have the typical characteristics of an overheated market. Granted, the TSX is above historically “normal” valuations, just like the U.S. markets. However, it is cheaper in an absolute sense, ignoring the qualitative differences between Canadian and U.S. stocks. In this article, I will explore why I don’t see these qualitative differences as being great enough to justify the current U.S. premium and why the TSX Index is likely worth the investment today.
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Canadian markets cheaper
As mentioned previously, the Canadian markets trade at lower multiples than U.S. markets. That could be because Canadian companies have lower growth or profit prospects than U.S. companies do — it’s hard to beat NVIDIA’s growth and margins, without a doubt. However, there are many cases of individual Canadian stocks priced more cheaply than U.S. stocks while having comparable growth.
Consider Toronto-Dominion Bank (TSX: TD), for example. It’s a Canadian bank stock whose revenue grew about 8% last year — faster than the large U.S. banks on average. Despite that, it trades at under 10 times earnings, which is much cheaper than the big U.S. banks.
Why is TD so much cheaper than the large U.S. banks, which trade at about 15 times earnings these days?
A big part of it is the simple fact that TD Bank got into a bit of trouble last year. It settled with the U.S. Department of Justice in a money-laundering probe, paying out $3 billion and agreeing to a $430 billion asset cap. However, TD’s U.S. retail business does not have much more than $430 billion in assets now, and its U.S. investment banking and Canadian banking businesses are unaffected. So, TD can re-invest the money it’s not allowed to invest in U.S. retail into other parts of its business.
TD is just one example among many quality Canadian companies trading at discounts to their U.S. peers. Similar examples can be found in sectors like energy, utilities, and non-bank financials.
Lower dividend taxes
A final fact you might want to take into account when deciding whether to invest in the U.S. or Canada is taxation. U.S. stocks have a 15% dividend withholding tax taken off them whether you hold them in a taxable account or a TFSA. Canadian stocks have no such tax. So, as a Canadian, you have a slight “edge” when buying Canadian stocks.
Foolish takeaway
The U.S. markets are certainly impressive. With their big tech companies and impressive financials, they certainly have a lot going for them. However, Canadian markets have a lot of value under the hood as well. So, perhaps this year, include some Canadian stocks in your portfolio if you aren’t doing so already.
