Canada equities

The Canadian equity market has had a turbulent first half of the year, with a steady but modest downdraft leading up to “Liberation Day,” followed by an easing of fears amid constructive dialogue out of the White House. The TSX has since risen double-digits and has rallied to a new all-time high. Notably, gold has continued to be a material driver of this performance. The strong run-up in gold (up approximately 25 percent year to date) bolstered investor sentiment towards gold miners, as higher bullion prices helped drive operating leverage and strong earnings growth. Much of the strength in gold has been driven by global central bank buying. China’s gold imports reached an 11-month high, increasing 73 percent m/m in April, as the People’s Bank of China (China’s central bank) eased restrictions on bullion inflows. Gold is also widely viewed by investors as a hedge against geopolitical, inflation, and U.S. dollar risks, and we believe these factors may keep gold prices elevated for the foreseeable future.

Furthermore, bank valuations now sit at a premium to historical averages, which have us questioning how much higher they can run. While RBC Capital Markets has updated its fiscal 2026 and 2027 estimates to include robust earnings growth and a normalization of provision for credit losses, we continue to monitor a broader environment of slowing loan growth and consumer credit risk.

As we look ahead, inflation has recently firmed up, and we think the path of the Bank of Canada’s interest rate policy will be largely determined by the extent of further softening in the economy. Global trade uncertainty continues to drive cautious sentiment among investors despite 2025 consensus earnings estimates for the TSX indicating roughly nine percent growth, which would be a healthy level. The TSX’s valuation has climbed higher over the course of the year, now sitting at 15.8x forward price/earnings, compared to the 10-year average of 15x. In similar fashion, equity risk premiums (the extra return investors require above a risk-free investment) are also below the longer-term average, indicating to us that investors may be looking through some of these near-term risk drivers.

Canada fixed income

With domestic inflation already near the Bank of Canada’s (BoC) target, we see the BoC as having the flexibility to respond to a potential economic downturn by cutting interest rates further. However, we question its need to do so at this time, having already delivered 225 basis points (bps) worth of cuts since mid-2024 and the benefits of those cuts already working their way through the economy. In fact, incoming fiscal stimulus from the Liberal Government and positive trade-tariff developments have seen investors begin to question the need for additional economic assistance by the central bank. The BoC remains in a “wait-and-see” mode, looking for stronger evidence of economic deterioration before adjusting policy rates further.

Following a tariff-induced market selloff in early April, cooling trade tensions have seen risk assets rebound and begin to retest pre-tariff levels. A strong equity rally since mid-April has already pushed the Canadian Equity Index above previous peaks, while the additional yield demanded by investors for the risk of default in Canadian corporate bonds, also known as the credit spread, has tightened thanks to improving investor confidence. In fact, most sectors within fixed income have seen credit spreads complete a round trip back to their late-2024 spread levels. All in, corporate-bond spreads in Canada remain below their historical average, indicating to us little sign of significant market concern.

We remind investors that the tariff situation remains fluid and will likely continue injecting uncertainty into global markets. When the yield compensation for risk is this low, investors are vulnerable if the outlook were to deteriorate. This is why we prefer safer categories of the fixed-income market, such as Government of Canada and investment-grade corporation issues rather than riskier categories, such as higher-yielding bonds issued by weaker balance sheet corporations.