The Canadian stock market is on fire! Over the past 12 months, the iShares S&P/TSX 60 Index ETF (TSX:XIU) — a popular benchmark for the Canadian stock market — surged nearly 25%. Add in cash distributions, and you’re looking at an incredible total return of over 28%.
That’s more than double the market’s 10-year average annual return of 11.2%.
With the Toronto Stock Exchange (TSX) on fire, many investors are wondering: Is now the time to jump in — or sit tight?
Let’s break it down.
Source: Getty Images
What’s fueling the rally?
Two main drivers are propelling the market higher: strong corporate earnings and lower interest rates.
Canadian companies — particularly in sectors like financials — have been posting impressive results. And investors are betting that this momentum will continue. At the same time, the Bank of Canada has been easing monetary policy, slashing its key interest rate from 5% in early 2024 to today’s 2.75%. Lower rates reduce borrowing costs, encourage consumer spending, and encourage more money to be invested in equities or stocks compared to fixed income.
Take the financial sector, for instance. Canadian banks — a backbone of the TSX — have had a banner year. The BMO Equal Weight Banks Index ETF (TSX:ZEB), as a benchmark for the big Canadian bank stocks, is up about 31%, delivering a total return of nearly 36%. These financial institutions are heavily weighted in many Canadian portfolios because of their long-term history of growing earnings and dividends.
It’s a feel-good moment in the market — but don’t confuse momentum with safety.
Hot market, hidden risks
Bull markets often spark euphoria, and that’s when investors are most vulnerable to costly mistakes.
Some common pitfalls during market highs include:
- Buying out of FOMO (fear of missing out)
- Overloading on hot sectors or stocks
- Chasing hype over fundamentals
- Investing lump sums with little consideration of entry points
These kinds of behaviours can lead to oversized risk exposure — and a painful experience for investors when sentiment shifts and the market corrects.
Markets that rise substantially often witness dips. Valuations are creeping higher, and many stocks are priced for perfection. One weak earnings report or economic hiccup could trigger a sharp pullback.
Smart ways to invest in a hot market
You don’t need to sit on the sidelines entirely — but you do need a strategy.
1. Dollar-cost averaging
Spread out your investments over time to reduce the risk of poor entry points. Platforms like Wealthsimple, which offer commission-free trading, make this approach easy and cost-effective.
2. Re-balance your portfolio
Trim profits from overheated sectors and redeploy capital into underweighted or undervalued areas.
3. Focus on fundamentals
Stick to companies with solid balance sheets, predictable cash flow, and reasonable valuations. Quality matters more than ever when markets are priced for growth.
4. Keep cash on hand
Cash may feel boring during bull runs, but it gives you the flexibility to buy when others panic — and that’s often when the best deals appear.
The Foolish investor takeaway
Yes, the market is on fire — and that’s exactly why you should proceed with caution.
This isn’t the time for a buying frenzy. It’s a time to pause, reassess your financial goals, and ensure your portfolio still reflects your risk tolerance and timeline. Re-balance where necessary, and resist the urge to chase high-flying stocks that may already be stretched.
Above all, make sure you have your financial foundation in place. That includes:
- An emergency fund covering three to six months of expenses
- Cash set aside for near-term needs like travel, home purchases, or other major life events
By investing thoughtfully — not emotionally — you’ll set yourself up to thrive no matter where the market heads next.
