Canada's equity benchmark is positioned to outperform its United States counterpart for a second year in a row, which would be its first back-to-back win in 15 years. The S&P/TSX Composite Index is up 9.9% so far this year, narrowly edging the S&P 500 Index's 9.6% gain after Tuesday's rally. However, both indices' advances are heavily concentrated in a single industry: chipmakers in the U.S. and banks in Canada.
Bank Stocks Drive TSX Gains
Roughly 60% of the Toronto stock market's gain this year stems from just five bank stocks. Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, and Bank of Nova Scotia have collectively added nearly 1,997 points, helping propel the benchmark 3,145 points higher. According to Colin Cieszynski, chief market strategist and portfolio manager at SIA Wealth Management, “This has been a spectacular first half of the year for the Canadian financials.” He noted that a commodities boom has been “underpinning the Canadian economy and that’s been good for the banks.”
US Market Concentration in Chipmakers
In the U.S., the five best-performing chipmaker stocks in the S&P 500, led by Micron Technology Inc., have contributed nearly 60% of the index's advance so far this year. When additional chip stocks such as Qualcomm Inc. or Nvidia Corp. are included, the S&P 500's gain is even more concentrated than its Toronto equivalent. Philip Petursson, chief investment strategist at IG Wealth Management, explained that in Canada, the stock market is fueled by the economic cycle rather than the technology cycle.
Economic Data Supports Outlook
Data released Tuesday showed the Canadian economy grew at a faster-than-expected clip in April, with a 0.5% expansion, alleviating recession fears after a contraction in the first quarter. “If the economic cycle continues to hold, and we think the risk of recession is very, very low in Canada or elsewhere around the world, it’s positive. But when the economy turns, that’s when the banks are going to start to face some headwinds,” Petursson said.
Broader Market Participation Expected
Petursson noted that the Canadian stock market's climb over the past year has been broader based than in the U.S., which has mostly been led by the AI craze. The concentration of gold miners in Canada has provided a lift, as have oil-producing stocks and tech darlings. He expects more sectors to boost the market through the rest of the year, rather than banks alone. Canadian bank stocks are now more expensive than at any point since the global financial crisis on a price-to-book-value basis, according to data compiled by Bloomberg. “The market itself still has room to move forward, but the contributions will come from other areas,” Petursson added.
