Why is Canada's TSX at all time highs, while Economic Indicators are very Concerning?

Globe and Mail

9 hours ago

TSX at All Time Highs
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Canada's TSX (Toronto Stock Exchange) is hitting all-time highs while many key economic indicators (continued falling GDP per Capita growth, rising unemployment (almost at 7%), dropping productivity, personal and corporate capital outflows, with limited business investment alonside rapid rising government and personal debt levels) are signaling concerning trends that warrant closer examination.
Here are several potential factors and explanations that could explain this seeming disconnect between the stock market performance and broader economic conditions:
1. Stock Market vs. Real Economy
The first thing to understand is that stock markets and the real economy often don't move in lockstep. Stocks represent the value of companies (and their future growth prospects) rather than the state of the broader economy. Markets can remain optimistic about corporate earnings and future growth, even when broader economic indicators—such as unemployment, inflation, or GDP growth—show signs of weakness.
Earnings Growth: The TSX is seeing a rise in its value due to strong earnings growth in key sectors (such as energy, commodities, and financials), even while macroeconomic conditions deteriorate. Companies within the TSX, especially in the energy and materials sectors, are benefiting from high commodity prices (oil, metals, etc.) while the overall economy struggles.
Divergence of Corporate Performance: While the economy may be slowing down, large companies with significant revenue from global markets or higher margins are still reporting strong profits. This leads to rising stock prices, even in the face of broader challenges.
2. Commodity Boom and Canada's Resource-Heavy Economy
Canada's stock market is heavily weighted toward sectors like energy, materials, and financials, which make up a significant portion of the TSX Composite Index. Many of these sectors have been benefiting from high commodity prices, especially:
Oil and Gas: Global energy demand has driven up oil and gas prices, leading to a significant boost in the market capitalization of companies like Suncor, Enbridge, and Cenovus, all of which are heavily represented on the TSX.
Metals and Mining: With ongoing demand for metals (such as copper, lithium, and gold), companies in the mining sector have seen increased earnings, which has lifted the overall market, even as other economic indicators are more concerning.
These commodity-driven sectors are benefiting from high inflation in global markets, particularly in energy and raw materials, and can sometimes push stock prices higher despite domestic economic difficulties.
3. Capital Inflows and Global Liquidity
Another significant factor driving the TSX to all-time highs may be global capital inflows, especially from institutional investors, looking for higher returns or stability amid global uncertainty. Canada's relatively stable financial system, coupled with its resource-rich economy, often makes it an attractive destination for foreign investment.
Low Interest Rates: In the past few years, central banks (including the Bank of Canada) have kept interest rates low, which often makes equities more attractive relative to fixed income (bonds) and cash. This leads to more money flowing into the stock market, pushing prices higher, even when there are signs of economic weakness in other areas.
Investors Seeking Safe Havens: In times of economic uncertainty, investors may seek refuge in companies that have strong balance sheets and stable dividend payments—traits that are commonly found in resource and energy companies.
4. Sector-Specific Strength
While the broader economy may be facing challenges like inflation, high consumer debt, and slower growth, the TSX might be benefiting from a sector-specific boom. For instance:
Financials: The TSX has a large weighting in financial institutions, many of which are experiencing profitability due to strong loan growth, higher interest rates, and the overall stability of Canada's financial sector.
Technology & Health: Although not as dominant in the TSX as other sectors, there has been growth in tech and healthcare stocks, which have benefited from global trends and long-term growth prospects, even if domestic economic indicators are more concerning.
5. Inflation and Corporate Pricing Power
Inflation, although a concern for the economy, can benefit certain companies—particularly those with significant pricing power. Many commodity-based companies and large-cap corporations are able to pass on costs to consumers, maintaining profitability despite inflationary pressures. This has helped keep their stock prices high, even when inflation and rising costs are hurting consumers.
Corporate Earnings Resilience: Despite concerns over inflation, and economic slowdown, many companies on the TSX have managed to grow earnings, which helps push stock prices up.
6. Expectations of Future Economic Recovery
Despite concerning economic indicators today, many investors might be betting on a future recovery in certain sectors or believe that economic pressures (such as inflation) are temporary. Optimism about the post-pandemic recovery, the green energy transition, or the potential for geopolitical stabilization might lead investors to take a long-term view on Canadian equities, especially those in energy and materials.
7. The Disconnect Between Economic Data and Investor Sentiment
The stock market is heavily influenced by sentiment and expectations about the future. Economic data can often be backward-looking, while markets are forward-looking. If investors are optimistic about future growth, particularly in key sectors like energy and resources, they may continue to drive up stock prices despite short-term concerns about economic conditions.
Market Timing and Speculation: Short-term market movements are also often influenced by speculation, and the expectation that certain sectors will outperform can cause overvaluation in the stock market, despite real economic weakness.
8. Government and Central Bank Actions
Monetary and fiscal policies have played a huge role in shaping market conditions. Despite concerns about the economy, loose monetary policies (low-interest rates, quantitative easing) from central banks globally, including the Bank of Canada, have contributed to a liquidity-driven rise in equity markets. Additionally, government spending (such as infrastructure investments and subsidies) can provide short-term boosts to sectors like construction and energy, which can lift stocks.
Outlook
Canada's economy in 2025 presents a concerning outlook, as the unemployment levels remains elevated, while the broader economic landscape faces challenges, such as GDP growth concerns, inflationary pressures, and higher interest rates.
The resource-heavy sectors like energy, financials, and natural resources continue to perform well, providing some economic stability and contributing to the all-time highs on the TSX.
However, concerns persist with rising housing costs, consumer debt, and regional disparities in job growth. The Canadian economy is navigating through these complexities with a mix of optimism from strong commodity exports and cautiousness due to global and domestic risks.