Canada’s stock market has generated only about 60 per cent of the returns of the S&P 500 since 2015.Aaron Vincent Elkaim/The Canadian Press
By now, it’s no secret Canada has a major investment problem.
Chronic underinvestment has sapped the country of the economic vigour that made it the world’s 10th largest by GDP in the first place. It’s a deep-seated issue that has only gotten worse over the past decade.
Canadian businesses are now investing 20 per cent less in machinery and equipment per worker than they did 10 years ago. Scores of major projects, particularly in the resource sectors, have been shelved over that time. Spending on research and development is low and declining relative to other top economies. And the Canadian stock market has generated only about 60 per cent of the returns of the S&P 500 since 2015.
In some quarters, Canada came to be seen as uninvestible. How to change that perception is the policy question of the era.
Let’s hope 2026 marks the turning point. Every Canadian has a stake in the country becoming an attractive place for capital, from the workers who have seen their wages decline relative to U.S. counterparts, to the everyday stock market investor with savings on the line in corporate Canada.
Not only is private-sector investment the lifeblood of the real economy, it’s also critical to stock market performance.
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Investment in things such as machinery and equipment are proven drivers of earnings growth. And the fact that Canadian companies have done very little of it in recent years compared with the U.S. corporate sector is plain to see in the stock charts.
Since 2015, the S&P 500 index INX has risen by 235 per cent, compared with 140 per cent for the S&P/TSX Composite Index TXCX. In dollar terms, a $1,000 investment in Canadian stocks would have grown to about $2,400 over that time. American stocks would have left you with $3,400 – a difference of 40 per cent.
There are lots of reasons for the performance gap. U.S. tech sector dominance is a big one. As is Canada’s dismal record on investment.
Canadian companies invest less in their businesses, are less productive and earn less as a result. A Canaccord Genuity analysis last year showed the earnings power of companies in the S&P/TSX Composite Index had declined by nearly 30 per cent against their U.S. competitors over the previous 20 years.
We can’t pin this all on the U.S. tech giants scaling to incredible heights in recent years. Even if you remove the tech sector from the equation entirely, corporate Canada still falls short on profitability.
Our companies also invest far less in R&D. A recent report by the Council of Canadian Academies found that investment in research by domestic businesses sits at around 1 per cent of GDP – roughly half the OECD average. Even more alarming is that the gap is widening.
There is something deficient in the way Canada operates and sustains its biggest businesses, and it’s impairing our economy and stock market alike.
None of this will be unwound quickly. Trevor Tombe, an economics professor at the University of Calgary, estimates that it will take at least until the middle of the century to close the productivity gap and make up the ground that’s been lost over the past decade.
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First, we need to see directional change. This is one of the goals of the federal budget unveiled last month, which targets a $1-trillion increase in total investment over the next five years.
The budget has been accompanied by two rounds of major projects meant to expand export capabilities to non-U.S. markets and refocus the national agenda on resource development. Then a couple of weeks ago came the bombshell agreement between Ottawa and Alberta for a potential new oil pipeline to the West Coast.
“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.
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“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.”
But nation-building is messy business. The proposed pipeline has brought the country’s economic revival into conflict with climate concerns, Indigenous rights, and provincial autonomy.
Turning around a $3.2-trillion economy was never going to be neat and tidy. The moment requires Canada to be urgently ambitious.
We can’t just wait out Donald Trump. Tariffs are not likely to vanish even when he vacates the Oval Office in three years. Plus, who knows what his intentions are with the continental trade agreement, which is up for review next year.
Canada needs a course correction. Let this be the year it starts to reveal itself.