Canadian equities outshine U.S. as gold, materials boom

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Craig Jerusalim, senior portfolio manager, Canadian equities, CIBC Asset Management 

* * * 

It’s funny to look back now, but our market optimism entering 2025 was a rather contrarian call at the time. 

In fact, most prognosticators were quite cautious on equities, and were calling for muted returns. While our forecast, not an official published firm-wide view, but rather our growth team’s fundamental view, was calling for Canadian equities to return 10% plus or minus, and outperform the U.S. benchmark, the S&P 500. 

The reason for our relative optimism was built on our bottom-up expectations for strong earnings growth, inexpensive relative valuation, and a healthy dividend yield pickup relative to the S&P 500. 

While we’ve been directionally correct, our optimism failed to live up to the hype and contributions from artificial intelligence spending across the value chain, from chips, to data centres, to the fuel sources and energy powering them, to the picks and shovels supporting the building blocks of this transformational technology. Not government shutdowns, nor heightened geopolitical risks, nor tariffs were able to quell investor enthusiasm for equities, largely because interest rates were heading lower, companies were actually experiencing margin enhancements, and risk appetites were high. 

Now, I have to clarify that our positive views were specifically directed towards Canadian equities, not the Canadian economy. Rising unemployment and sluggish growth, as well as the negative Trump tariffs were all reasons for caution on the economy. However, close to 60% of Canadian equity revenue is generated outside of our provinces and territories, with approximately 40% directly generated from the stronger U.S. market. 

We’ve always said that the economy is not the stock market and the stock market is not the economy, and this year is definitely proof of that. 

Looking forward, Canada’s recently passed budget includes some benefits U.S. companies received in the Big Beautiful Bill south of the border, such as accelerated depreciation and tax savings for the middle class, which is aimed at sparking that economic kick that is so desperately needed. 

As we make our way through the fourth quarter of the year, it’s the perfect time to reflect on the spectacular run Canadian equities have indeed experienced in 2025. The TSX is outpacing the S&P 500 by over 10%, returning over 25% as of mid-November. Additionally, the TSX has now exceeded the returns on the S&P 500 on a total-return basis over the past five years, despite the dominance of the Magnificent Seven group of companies. 

Canada’s greater diversification, comparable earnings growth, higher dividend yield and cheaper valuations are the main reason for the TSX’s outperformance and, most importantly, continue to be the main factors lending strength to our call for relative outperformance for the TSX over the S&P 500 again in 2026. 

* * * 

One of the biggest contributors to performance this year has been materials, specifically gold stocks. While the TSX is up an impressive 25% this year, the material sector is up over 80%, and gold stocks are up well over 100% this year, and over 200% over the past three years. To say the sector has been on fire would be an understatement. 

I would even go as far as saying that the intensity of the rally has actually been justified, largely due to the strength of the underlying gold commodity price. Bullion has doubled over the past three years, and is up over 50% this year to an all-time record high. 

While gold is often bought as a hedge against inflation, or as a safe-haven asset during geopolitical crisis, or as a diversifier from equities, the reason for the recent strength seems to be driven more by the desire of central banks to diversify away from the U.S. dollar and treasuries. Specifically, countries like China and Russia do not want to be held captive by their large U.S. Treasury exposure, yet there is not enough alternative currencies that are stable, durable and have the scale. 

And therefore, many central banks are left purchasing large amounts of gold regardless of the spot price. And given the starting point where China sits with respect to gold as a percentage of central bank reserves, there’s good reason to believe that there is still lots of buying to occur. Just for context, China’s central bank has approximately 8% of their foreign reserves in gold, versus a global average around 25%. They still have a long way to go. 

From our fund’s perspective, our current gold weight is the most gold we’ve ever held because gold producers offer a levered play on the commodity given the tremendous excess free cash flow that they are generating at current prices. And more importantly, many of the largest and highest-quality gold producers have come to the realization that they will be rewarded for profitable growth, as opposed to empire building, and are therefore returning this cash flow back to shareholders in the form of dividends and buybacks because, largely, they’ve already paid down all of their debt. The setup for companies like Barrick, Agnico Eagle, and Alamos look particularly attractive. 

* * * 

The other major trend in 2025 — that unfortunately worked against our style and investment process, but positions us very well for 2026 —was the tremendous underperformance in the quality factor in favour of momentum, value and low quality. As perverse as it sounds, the lowest quality index constituents as measured by low profitability, low return on equity, [and] high leverage were the strongest outperforming securities. 

Most of the low-quality rally was propelled by the materials sector, but also unprofitable technology or junk tech, and select rebounding value securities — all subcategories that underperformed through the cycle, but simply had a tremendous move given the perfect storm of high commodity prices, AI hype, reversion to the mean trade, and momentum chasers. 

The most important thing to note, however, is that these low-quality rallies never last. And we saw something similar happen in the fourth quarter of 2018, as well as early 2022, where speculative investments rallied only to significantly correct the following year. 

And that’s how we’re approaching this episode. We are excited about the number of high-quality, boring compounders that are now trading at very reasonable and rare valuation discounts, which we see as an incredibly attractive entry point, while others just chase speculation. 

Diverse companies like Intact Financial, Element Fleet, Fairfax, Waste Connections, GFL, Trisura, Thomson Reuters, and Boyd Group all fit this mould, and we fully expect [them] to outperform over the long period with these investments. 

A 2025 year in review would also not be complete without addressing the AI bubble debate. 

We saw speculative returns directly impact companies like Celestica, and helped boost Shopify briefly to the largest market-cap company on the TSX. But it also accelerated returns in sectors like utilities that helped power the data centres, energy through the uranium contracts, and nuclear re-engagement via Cameco and Brookfield’s Westinghouse business, as well as engineering and construction firms, like AtkinsRéalis, WSP and Stantec. 

Where there are no shortage of billionaires, prognosticators and permabears, such as Michael Burry, Albert Edwards, and even Jamie Dimon expressing concern about the potential economic fallout if [the] stock market were to suddenly decline from its high valuation, we are less concerned with broader equity impacts because the companies we’re focusing on are actually seeing productivity gains from AI, and experiencing real and sustainable margin enhancements across their businesses. We are seeing tangible benefits from AI show up in earnings in ways beyond just headcount reductions or minor productivity gains. 

For example, companies like TC Energy are using AI and machine learning to enhance the throughput of natural gas through their existing pipelines, and increasing throughput by up to 10%. This change can translate into an incremental billion dollars of EBITDA for shareholders without any change in headcount, and with only minor investments. 

Brookfield Asset Management also announced an initial $10-billion AI infrastructure fund, along with partners Nvidia and the Kuwait Investment Authority, which will be levered up to $100 billion on largely contracted AI infrastructure spend, which Brookfield will collect fees and earn carry on for years to come. 

We also have more valuation support here in Canada relative to U.S. indices, without the risk of giant expectations and speculation. The risk/reward for Canadian equity AI beneficiaries is far less speculative and far more predictable. 

* * * 

Equity investors may have been somewhat spoiled with 2025’s spectacular returns, with minimal volatility. In fact, there hasn’t been a single correction greater than 3% since the April Liberation Day lows. And that is not the norm. Most years experience two to three 5% corrections, one to two 10% correction, and if scares or a recession occur, a 20% correction. 30% corrections only occur in the case of bubbles, frauds or financial crises — setups I do not foresee. 

However, we have to expect a return to more normal levels of volatility, and expect to see more of those 5% to 10% corrections that ultimately become the next buying opportunities. 

If I was pinned down and had to give my 2026 prediction as of today, I would say that today’s TSX valuation, which is slightly above long-term averages but for good reasons, likely doesn’t fluctuate too far from the current levels. Therefore, based on a bottom-up consensus estimate for 10% earnings growth, plus an additional 2.7% dividend yield, I would expect another year of low double-digit returns for the TSX, but with a lot more volatility this year relative to last, and the biggest risk being AI spending disappointments hitting investor sentiment. 

The S&P 500 is even more vulnerable on that front, as valuation declines, given its starting level relative to its own history, are a concern. So once again, I’m calling for a year of outperformance for the TSX over the S&P 500. 

Forecasting is never easy, but this year, we have high conviction in our basket of high-quality defensive compounders, and expect to be at least directionally correct. And of course, we will course correct as well along the way, as the information in front of us evolves. 

Happy New Year, and good luck investing out there! 

* * *

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.