Canada Economy 2025: Will Growth Return?

Experts expect the Canadian equity market to build on the momentum it established in 2024, even as political uncertainty persists. While the outlook is broadly constructive, investors should brace for increased volatility and a somewhat slower pace of gains compared with last year.

“The underlying fundamentals are strong,” said Angelo Kourkafas, senior investment strategist at Edward Jones. He highlighted steady economic growth, rising corporate profits and an outlook for gradual interest-rate easing as the primary supports that should keep the bull market intact into 2025.

After a banner year in 2024—when the S&P/TSX Composite Index finished roughly 18% higher—Kourkafas expects the market to continue upward, but noted the advance will likely be more measured and punctuated by larger swings.

Tariffs and tech valuations are clear downside risks

Despite favorable fundamentals, several risks could temper the TSX’s progress in 2025. Ongoing tariff threats from the U.S. could weigh on business investment and trade-sensitive sectors, Kourkafas warned. In addition, overvalued pockets of U.S. technology stocks—fueled in part by enthusiasm for artificial intelligence—could create spillover risk if valuations reprice suddenly.

Still, many analysts argue the TSX’s gains rest on a solid base. Brianne Gardner, senior wealth manager at Velocity Investment Partners, noted that broad-based profit growth and easing interest-rate expectations from the Bank of Canada should help push equities higher.

Commodity strength, particularly in energy and materials, is expected to underpin the TSX in 2025, Gardner added. Federal infrastructure investments aimed at increasing housing supply could support demand for materials, while a softer Canadian dollar may attract additional foreign capital to Canadian equities. The financial sector, buoyed by upcoming mortgage renewals, is also positioned to benefit from improving profitability as rates moderate.

TSX likely to trail the S&P 500 in 2025

On the earnings front, Kourkafas expects acceleration after a muted reporting period: he forecasts average earnings growth of roughly 10% to 12% for TSX-listed companies in 2025. That earnings momentum should support higher equity prices overall.

Nevertheless, the TSX is expected to underperform the S&P 500 this year. Kourkafas and others point to Canada’s relatively slower economic momentum and greater exposure to trade risks as factors that will keep the gap with the U.S. benchmark in place, even as it narrows.

Gardner said the U.S. market is likely to remain the leader in the near term, especially given pro-business policy expectations south of the border. She added, however, that the TSX could pick up strength in the second half of 2025 as Canadian interest rates ease further and domestic consumer spending gains traction.

Diversification will be essential for investors

Portfolio diversification is likely to be a key theme in 2025, according to Brian Madden, chief investment officer at First Avenue Investment Counsel. Madden emphasizes the importance of spreading risk across geographies, sectors and asset classes rather than concentrating exposure in a few names.

For his clients, Madden keeps a roughly 50/50 equity allocation between the U.S. and Canada and said investors should focus on where opportunities exist rather than choosing one market over the other. He encourages active stock selection—finding mispriced or undervalued companies—rather than passively leaning on the largest tech names.

Targeting industries less exposed to tariffs, such as the service sector, can be another way to manage external risks. Madden also recommends owning companies with pricing power that can pass on added costs to customers without losing market share. Combined, these approaches help build a portfolio that is more resilient to market corrections and the variety of shocks that can appear during the year.

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