Canadian stocks in 2025: Three reasons why they’re poised to outperform

As of the end of December 2024, the S&P/TSX Composite Index, which serves as a benchmark for Canadian equity performance, and the S&P 500, representing U.S. equities, were in a virtual dead heat, each reflecting a total return of approximately 30% since the end of 2021. This parity underscores the competitive landscape of both markets, highlighting each market’s resilience and the dynamic nature of equity performance across North America.

However, unlike the performance of the S&P/TSX, the S&P 500 relied on multiple expansion for a good portion of its success. Typically, an index benefits from a high multiple when earnings growth is strong and profitability is high. Both factors are squarely in play today and the S&P/TSX is now increasingly benefiting from both factors, offering comparable growth and profitability.

The earnings growth for the S&P/TSX in 2025 is expected to be in the low double digits, with 9% profit margins versus a very similar 13% earnings growth and 10% profit margins for the S&P 500. This isn’t wide enough to justify the difference in valuation. However, the premium between the two indices is likely to narrow by the TSX multiple going up or the S&P 500 multiple coming down. Either way, that spells outperformance for the Canadian benchmark.

A second reason to like Canadian stocks in 2025 and the S&P/TSX is the yield advantage. With central banks around the world expected to continue lowering interest rates this year, income investors are looking for opportunities to diversify, and dividend-yielding stocks are one solution. The TSX offers a dividend yield close to 3% — more than double the dividend yield of the S&P 500. That yield advantage offers a nice safety net if the market becomes more volatile and takes an unfavourable turn.

There’s also much to like about the diversification of the TSX. The last few years have seen remarkable performance by the Magnificent Seven. However, their concentration in the S&P 500 benchmark exposes them to a degree of risk. Should one or more of these technology stocks stall, the S&P 500 benchmark would be inordinately impacted. On the other hand, the TSX benefits from global growth and has more diversified pillars covering financials, energy, and materials, not to mention emerging technology and industrial sectors.

As an example, let’s briefly consider investing in the energy sector. The setup for the large energy producers in Canada is quite compelling for the following reasons:

• Their share prices are trading at close to trough levels
• They’ve lowered their cost base below CAD$40–$50 per barrel, which means they’re generating excess free cash flow at today’s depressed oil prices
• They’ve largely paid down their debt, meaning much of their excess free cash flow is coming back to shareholders in the form of dividends and buybacks
• There’s enough oil in the oil sands to keep them operating for decades, and will likely be among the last producers standing no matter how long the energy transition takes

So while the Magnificent Seven may be garnering all the headlines, equity investors would be wise to consider Canadian stocks in 2025 to help garnish and grow their portfolios.

CIBC Asset Management is committed to providing market and investment insights. We want to help you find the right solutions to guide your investment journey. If you'd like to discuss this commentary in more detail or have questions about your investment portfolio, get in touch with your advisor or CIBC representative anytime. For more information, visit CIBC Asset Management.