Gold stocks and the Big Six banks have been the two forces propelling the Canadian stock market toward the history books this year.Paige Taylor White/The Canadian Press
Believe it or not, Canadian stocks are in the running to post their best year in modern history.
With less than a month to go, the S&P/TSX Composite Index is sporting a return of 30.4 per cent including dividends. That puts 2025 neck-and-neck in the race for the best year in Canadian equities, according to data dating back to 1988. The current high-water mark, set in 2009, is 35.1 per cent.
Not bad for a country mired in a trade war/productivity crisis/housing slump.
It’s fair to wonder how much more we can realistically expect out of this rally. There’s not much chance of 2025 repeating itself next year, at least not in the same way.
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Gold stocks and the Big Six banks have been the two main forces propelling the Canadian stock market toward the history books this year.
On both counts, things now look a bit stretched. Bank stocks are pricier than they’ve been in more than a decade. And gold miners were catapulted skyward by a once-in-a-generation run-up in bullion prices.
There is probably only one other sector that could take over the heavy lifting in 2026 – energy.
Attitudes toward Canadian oil and gas are changing fast. The clouding of Canada’s economic future this year gave new urgency to the development of conventional energy, with a wave of major projects now on the table including a new oil pipeline to the West Coast, according to a memorandum of understanding between Ottawa and Alberta.
“We view this agreement as foundational to making Canada investable again,” Stéfane Marion, chief economist and strategist at National Bank Financial, said in a note.
“The fact that the oil and gas sector is no longer treated as a stranded asset could meaningfully reignite investor interest in the S&P/TSX energy complex and, over time, foster a renewed wave of foreign direct investment into Canada.”
It’s been a very long time since investors had much interest at all in the oil patch. The fossil fuel divestment movement aimed to strip the sector of growth capital, while the development of pipelines in Canada became a bitterly divisive policy issue.
Investors withdrew en masse. Billions of dollars flowed out of energy-focused investment funds.
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The exodus continues, in fact. A net of $542-million has been pulled from Canadian energy exchange-traded funds so far this year, according to National Bank of Canada.
One perk of being out of favour for so long is that energy sector valuations are significantly discounted to long-term averages.
There aren’t many other pockets of the TSX where that’s still true.
A few years ago, the S&P/TSX Composite Index was trading at around 12 times forward earnings estimates. For longer-term investors, it was almost a no-brainer that valuations would bounce back toward average levels.
They did that, and then some. Three consecutive calendar years of double-digit gains – barring a market crash in the next couple of weeks – have brought the cumulative upside in the TSX to a blistering 77.3 per cent since the end of 2022.
The TSX is now trading at a multiple of around 16.5, which is well above the average over the last 10 years.
At the head of the pack is the financials sector, which is dominated by the big banks, and the materials sector, which is dominated by the gold miners. Those two groups are responsible for nearly 70 per cent of the gains this year in Canadian equities.
The big banks have had a remarkable year, shrugging off concerns about the Canadian economy and the Canadian consumer. Shares of Toronto-Dominion Bank, for example, are up 60 per cent on the year.
But the big banks are richly priced at the same time as household debt stress is building and consumer insolvencies are on the rise.
Gold stocks, on the other hand, are technically still trading at a discount, even after the group more than doubled on the year. But gold is a fickle asset.
“Folks won’t pay up too much for the elevated earnings of gold companies because they can disappear as quickly as they appeared,” Craig Basinger, chief market strategist at Purpose Investments, said in a note.
Of the remaining sectors, only energy, industrials and technology are big enough to meaningfully influence the index.
Technology is basically synonymous with Shopify Inc. SHOP-T And industrials are especially sensitive to trade friction and tariffs. “Given that the U.S.-Mexico-Canada Agreement goes into review in 2026, that’s a big wild card,” Mr. Basinger said.
That leaves oil and gas as best positioned to carry the day.
If this great run in Canadian stocks is going to extend into the new year, the energy sector may have to step into the lead.