This year has been a tug-of-war between narrative, noise and numbers and after Thursday, rest assured, the noise isn’t ending anytime soon. Now that the U.S. government wants to take a stake in Intel only days after the President called for the CEO to be turfed, it’s clear that mega-cap headlines still dominate. But under the hood, 2025 has also rewarded old-fashioned cash engines—Canadian banks, integrated energy, and a sprinkling of industrials. On both a simple price and total return basis, the S&P/TSX has outperformed the S&P 500 year-to-date, and while the U.S. continues to win on breadth of earnings growth, Canada wins on cyclicals that monetize today rather than tomorrow, as well as on currency.

The above chart shows the S&P/TSX index against the S&P500 from the start of the year, with the TSX up 12.9% as of Thursday against a 10% lift in the S&P.  The gap is larger if we compare the TSX to the Dow Jones (+5.6%) and the Russell 2000 (+3.1%), but it is still marginally ahead of the NASDAQ even with the recent surge in mega-cap tech.  Keep in mind that these comparisons are based on local currencies.  If we instead evaluate the performance in say Canadian dollars, then the TSX has outpaced its U.S. by a wider margin. At the end of 2024, the Loonie was trading at 69.50 US cents.  Today it is 72.40 cents and that’s down around a cent from its highs back in June. That represents a gain of just over 4% against the American greenback, which means that in Canadian dollar terms, the TSX has about a 7% advantage versus the S&P.

What matters though as we head into the fall is less about who is winning this game after months, but whether that pattern holds for the remainder of the year and into 2026. If we simply look at how the latest earnings season has panned out, you wouldn’t expect to see Canadian stocks in the lead at this juncture.  With the majority of S&P500 firms having reported, this season was definitely better than what most analysts expected in terms of earnings.  As I show in the above chart, only one of the 11 major sub-groups saw less than half beating expectations (if you add in the companies that met expectations, it comes in at 50%). Information technology still has just over 10 firms to report, but 96% of those that have come in have either beat or met street estimates. Communications, financials, industrials, health care, staples, and energy have all seen more than 80% of companies beat estimates.  In terms of financials, money‑center banks are benefiting from revenue growth in trading and wealth, while commercial real estate concerns have been pushed to the backburner, rightly or wrongly.

As you can see above, technology, financials, materials and real estate have delivered this season, with close to or above 80% of companies meeting or coming in ahead of estimates. Canadian banks are leaning into expense control, and combined with a capital markets rebound, strong insurance growth and stable net interest margins, the sector looks resilient. Other groups, however, have been lacklustre. Communications, energy and health care have been particularly disappointing. Analysts have been marking down expectations in the energy patch, based on the recent slide in crude oil prices. Still, some of the misses this quarter were acute, as with Nexgen, Energy Fuels, Nuvista and Vermillion. Domestic retailers have seen some benefit from a shift in spending behaviour by Canadians from U.S. goods to Canadian-made products, but there have been some indications this effect might be lessening. Metro reported third-quarter earnings that were ahead of the same period a year ago, but still lagged street estimates. Although the earnings comps this season between Canada and the U.S. don’t appear to support the case for the TSX to maintain its lead over the S&P during the remainder of the year, there are still other factors are still at play.

For one, The TSX still trades at a material valuation discount to the S&P 500, with a P/E ratio of 19.9 versus 28 for the S&P500. That combination gives Canada more multiple-expansion room and a steadier carry if volatility returns. The average dividend yield  for the TSX is also double that of the S&P, at 2.9% compared to 1.4%. Second, we believe that gold prices will continue to advance as geopolitical uncertainty remains. This should power the materials sector, providing a tailwind for the TSX.

On the macro side, I would argue that the path to lower interest rates in Canada is still clearer than what we see south of the border. Since the weaker-than-expected U.S. payrolls, economists have shifted almost unanimously towards a quarter-point cut by the Fed in September, with some raising the possibility of a 50bp move. Unfortunately, the inflation metrics in the U.S. have not been friendly. Case in point, the stronger-than-expected PPI print this week that now has PPI inflation at 3.3%. By contrast, Canadian PPI in June was up less than 2%. Even though the Bank of Canada has remained on hold in recent meetings, officials were leaning towards a cut at the last meeting and have the macro backdrop to do so.

Two other factors could help the TSX maintain an outperform over the S&P in the coming months, though they are less certain. The recent U.S. rally has been narrow and mega-cap concentrated, but some analysts see a setup for rotation toward value/cyclicals/dividends—areas where the TSX is overweight (Financials, Energy, Industrials, Materials). Should breadth normalize, Canada’s factor tilts tend to win.  The other tailwind would be if the Canadian dollar heads back to re-test its highs above 73-1/2 cents and pushes towards 75 cents. This would trim translated U.S. returns and could see domestic and investors increase their weightings towards Canadian equities.

How the second half pans out is still anyone’s guess, but if we narrow it down to three possible scenarios, I would suggest if we get a soft-landing, then North American growth cools, but Canada could still keep its edge. If a hard-landing develops, then defensives would be favoured and I still see this benefiting Canada in terms of which market sees the heaviest pullback. Only if we see a re-acceleration in the U.S. economy would I expect the U.S. to outperform.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle