EQUITIES COMMENT – “2025 A TOUGH ACT TO FOLLOW”

2025 was a year of booming global stock markets despite a trade "attack" on many countries instigated by the Trump administration. Increased government spending, lower interest rates, and the AI revolution supported the economy and softened the impact of tariffs. A combination of strong earnings growth and increased valuations (p/e multiples) powered stocks. The S&P/TSX Composite was one of the best-performing indices, returning 31.7%, compared to the MSCI World Index at 18.9% and the U.S S&P 500 at 12.4% (in Canadian dollars).

Gold stocks can take a lot of credit for the stellar return of the S&P/TSX Composite last year. They more than doubled as bullion increased 65%. The Materials sector, which includes gold, added 11% to the TSX return. Financials were the unsung hero, contributing 10% to the TSX gain.

Turning to sector returns for the TSX, it is easy to see the influence of Materials. Financials and Consumer Discretionary had similar returns near 30%. Sectors associated with Artificial Intelligence, Technology and Communications continued to be leaders for the S&P 500. Industrials were the only other sector to have higher returns than the S&P 500. This group is being lifted by increased orders for Aerospace and Defence firms, along with greater activity associated with the AI data centre expansion.

Not only did Canadian and U.S stocks post strong earnings gains in 2025 (approximately 12%), but p/e multiples increased. For the TSX, the p/e multiple has been below the long-term average for several years; however, due to a significant increase in 2025, it is now above it. Other global stock indices also experienced a major p/e expansion last year. Forecasters are expecting at least two more years of double-digit earnings growth for the TSX Composite and S&P 500. Should earnings meet expectations, returns of approximately 10%-15%, including dividends, are possible for the TSX and S&P 500. This assumes p/e multiples remain stable.

Economic growth disappoints - Canada seems particularly vulnerable to this risk. It could experience a more negative trade environment once the USMCA is renegotiated with the U.S. and Mexico. The medium-term effect of the U.S takeover of Venezuela's oil fields could also jeopardize our economy if it results in lower oil volumes going to the United States. Bond yields rise due to inflation worries. If short-term rates are too low, this has historically resulted in increased inflation. Higher bond yields would put downward pressure on p/e multiples.

Commodity prices weaken - TSX earnings growth would be reduced if there was a significant correction in gold. There are indications demand for gold from central bankers is waning, and it is investors that are now driving gold prices. They tend to be short-term traders, so at any sign of a downturn in gold, large-scale selling could occur. Developments in the field of AI disappoint investors. Companies are spending billions to add cloud capacity, while the usage of AI apps that are for sale is considerably lower. Assuming the risks we identified do not transpire, the TSX Composite could end the year near 35,500, and the S&P 500 could reach 7,800.