The Toronto Stock Exchange (TSX) set a new all-time high last Tuesday. Closing at 26,029 points, it was slightly up from Friday’s close, which itself was headline-grabbing. The TSX’s all-time high might have grabbed headlines because the milestone contrasts sharply with the performance of the U.S. indexes this year: the NASDAQ is down and the S&P 500 is roughly flat. In light of the weak U.S. performance, Canada’s all-time high was unusual to see.
I don’t mean to brag, but I saw all this coming. In early 2024, I wrote several articles that said Canadian equities looked more attractive than U.S. equities because of their cheaper valuations and less risk stemming from Trump tariffs. One example of such an article was “S&P 500 at All-Time Highs: Why Canadians Should Shop Local Instead.” The TSX Index has outperformed the S&P 500 since that article was published.
Now that I’m done patting myself on the back, I should turn to the more important matter: what to do now. Seeing Canada outperform the U.S. this year might bring a little shot of patriotic pride, but it’s not necessarily a reason to continue holding TSX stocks this year: home-field bias is a major drag on investors’ returns. In this article, I will explore what you can do with your money now that the TSX is at an all-time high.
How the TSX got here
Before exploring some investments that could work despite the TSX’s rapidly steepening valuation, I should explain how the TSX got here.
The most literally correct explanation for the TSX’s recent all-time high is that investors bought more TSX stocks than they sold this year. This is somewhat obvious, though. What we really want to know is why investors bought so much TSX equity this year.
One possible reason could be that they pulled money out of the U.S. and decided to invest it elsewhere. Donald Trump’s April 2 tariff announcement stoked fear in investors worldwide. U.S. markets plunged; global markets fell to a lesser extent. The investors selling U.S. stocks then wanted out of a market perceived as risky. However, they may have wanted to stay invested in equities, in which case Canadian markets would have offered what they needed.
A second possible reason is that investors saw value in Canadian markets. At the start of this year, the TSX was relatively modestly valued, trading at about 20 times earnings. The S&P 500 was closer to 30 times. Seeing this, investors may have decided to up their allocation to TSX stocks.
What to do now
Having shared how we got here, it’s time to explore where to find value in TSX stocks today.
In general, Canadian energy stocks are pretty modestly valued. They got that way because oil prices crashed this year, but crude prices are already starting to recover from their April beatdown.
Let’s take Suncor Energy (TSX:SU) stock as a case in point. It trades at 9.3 times earnings, which is much cheaper than the TSX Index as a whole. Despite the cheapness, the company is ultra-profitable, with a 16% free cash flow margin and a 14% return on equity. The company does tend to make less money when oil prices are low; however, it has refining and gas station businesses that aren’t as oil price-sensitive as its crude operations. Lastly, the company is a decent dividend play with a roughly 4.6% yield. So, Suncor stock has things going for it right now. It’s the same story with many other TSX energy stocks, which are dirt cheap compared to the broader market.
