Canadian equities are currently trading at a forward price-earnings ratio of around 16.4, compared to 21.5 for the US market, a spread that has rarely been this wide. The Canadian market also offers a dividend yield of approximately 2.1%, which is double that of the US.
Despite the TSX benchmark index outperforming other major developed markets for much of this year, fundamentals remain solid. Earnings growth is expected to reach the low teens this year, with inflation in check, interest rates steady, and employment stable. However, potential trouble on the trading front could introduce market instability.
Canada's economy is closely linked to the US, with about 75% of its exports still going to its southern neighbour. Negotiations for the Canada-United States-Mexico Agreement (CUSMA), which was intended to protect around 90% of Canadian goods from US tariffs, have seen the US recently threaten Canada with additional import levies, creating considerable uncertainty.
Prime Minister Carney is reportedly leading efforts to reduce Canada's dependence on the US, though disentangling integrated supply chains is expected to be a laborious process.