Canadian stocks attractively valued versus U.S. counterparts

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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. 

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Tudor Padure, portfolio manager, equities, CIBC Asset Management 

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In September, the U.S. Federal Reserve executed its first interest rate cut of 2025, a highly anticipated and politically charged move prompted by signs of labour market softening. The path from here, though, is less clear, as the U.S. economy remains strong, the unemployment rate at 4.3% is still historically low, and further data points are likely needed to gain comfort on the inflation path. 

Meanwhile, the Bank of Canada implemented its third 25-basis-point rate cut of the year, driven by economic pressures from U.S. tariffs impacting trade and labour markets. However, the Bank of Canada did adopt a more hawkish tone, indicating a cautious approach to future interest rate decisions. 

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We continue to believe that Canadian equities are attractively valued, particularly when stacked against the U.S. markets. To set the stage, let’s look at recent performance. The TSX has had a stellar year, outperforming the S&P 500 by about 13%, and the Nasdaq by 8% year-to-date on a total-return basis. This surge has been primarily driven by robust gains in the material sector, which is up over 77% since January. 

Now, if we zoom out to a five-year view, the TSX has actually outpaced both the S&P 500 and the Nasdaq, a trend that we believe, frankly, doesn’t get the spotlight it deserves. Looking ahead, though, valuations play a critical role in our optimistic outlook for Canada over the next several years. 

Valuations really hinge on two key drivers: profitability and earnings growth. So comparing the TSX to the S&P 500, as of September 30, 2025, consensus estimates project next 12-month earnings per share growth of 11% for the S&P, and 9% to 10% for the TSX. So essentially, neck and neck. 

On profit margins, the S&P 500 also edges out the TSX slightly, but the gap is less than 1%. They’re both at healthy levels in that mid-teens range. So Canada is keeping pace with the U.S. on these fundamentals, yet the TSX trades at a forward price-to-earnings ratio of roughly 17x, and that compares to 23x for the S&P 500. That’s roughly a 25% discount, significantly wider than the historical average of 10%. 

So in other words, Canadian equities today are about 15% cheaper relative to their U.S. counterparts, offering what we believe to be compelling value opportunity for investors seeking exposure to quality markets at a discount. 

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One potential concern investors may have is tied to economic growth, where Canada’s GDP growth is trailing the U.S. I think first, it’s important to note that 50% of TSX revenues come from outside of Canada, with roughly 30% directly tied to the U.S market. This means many of Canada’s leading companies are global players, not solely dependent on domestic economic conditions. 

For example, we have some major Canadian banks. We have industrial companies, such as Element Fleet Management, or the Brookfield suite of companies that derives significant earnings from international operations, particularly in the U.S., which is experiencing that stronger growth. This global exposure helps insulate the TSX from Canada’s slower GDP trajectory. As a result, it’s not surprising to see, as I mentioned, that consensus earnings growth forecasts for the TSX remain robust and align quite closely with that of the S&P 500. 

And lastly, albeit early days, we are cautiously optimistic and encouraged by the focus on growth and infrastructure from Canada’s federal government. Prime Minister Mark Carney recently announced the creation of the Major Projects Office, which is headquartered in Calgary, to streamline approvals for nation-building initiatives. Some key projects include LNG Canada Phase 2, and the Darlington new nuclear project. If successful, this could provide a lift to Canadian GDP growth in the outer years. 

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I believe, by and large, the biggest risk to Canadian equities is the upcoming USMCA negotiation. Now, for reference, the USMCA – the United States-Mexico-Canada Agreement — is the free-trade framework that replaced NAFTA, and took effect on July 1 of 2020. It stands to govern much of North America’s trade, and its renewal is slated for July 2026, or really just around the corner. 

Canada currently enjoys a relatively insulated position from tariffs, with an average tariff rate in the mid-single digits, well below the global trade weighted average of 10%, and far lower than the 40% faced by some countries, such as China. And this is because most Canadian exports to the U.S. comply with these USMCA rules, making them tariff exempt. 

However, the upcoming negotiations introduce uncertainty. A significant tariff hike could disrupt trade flows, particularly for sectors like manufacturing and energy. With all that said, though, we do believe the risk is manageable. A resolution that avoids a dramatic tariff increase could lift a significant overhang, and potentially spur capital inflows into Canadian equities. Investors should keep a close eye on these talks, as they could shape market sentiment in the near term. 

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The valuation gap between Canada and the U.S., combined with the strength of high-quality Canadian companies underpins our constructive outlook on Canadian equities. Despite the recent market gains, the TSX offers compelling opportunities in high-quality companies across sectors. 

I’ll start with industrials. The rotation into cyclicals has weighed on waste management companies, such as GFL Environmental and Waste Connections, as their stable earnings profile are less sensitive to economic cycles. However, we value their consistent double-digit earnings and free cash flow growth, as they provide an essential service, which gives them staying power in what is a fragmented industry where landfills are becoming increasingly scarce. 

Additionally, President Trump’s Big Beautiful Bill, which reinstates bonus depreciation, is expected to enhance free cash flow for both companies by reducing tax burden and supporting higher U.S. capital expenditures, which could be accretive to solid waste volumes. We are increasing our exposure to these names to capitalize on current valuation dislocations. 

Now next, I’ll talk about technology, companies such as Constellation Software and Descartes Systems, have underperformed recently due to concerns about generative AI’s impact on software and SaaS, or software as a service business models. While AI will undoubtedly bring changes, these companies, we believe, are relatively well-equipped to adapt. Their scale, as market leaders, allows them to integrate AI into their offerings, leveraging rich proprietary data sets to enhance their products. Additionally, their mission-critical software creates high switching costs, embedding them deeply in their customer workflows. 

Now, Constellation Software faced additional pressure following the unexpected resignation of founder Mark Leonard for health reasons. While Leonard’s 30-year track record is truly unmatched, incoming CEO Mark Miller’s multi-decade tenure, combined with the company’s decentralized structure, provides continuity. We remain confident in Constellation’s long-term execution. 

This resilience, combined with attractive valuations, which are well below historical averages for both companies, make these technology names compelling for long-term investors. Ultimately, we seek companies with high returns on capital underpinned by durable competitive advantages, trading at reasonable valuations. 

The TSX offers a rich hunting ground for such opportunities, particularly in the industries mentioned of industrials and technology, which should make the TSX an attractive destination for investors with a long-term horizon. 

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