Canadian S&P/TSX's Strong Performance

Despite ongoing global trade tensions and a weakening economy, Canada's main stock market benchmark, the S&P/TSX Composite Index, outperformed its US counterparts in the first half of the year, driven by a record-breaking gold rally. As of June 30, the index was up 8.6% year-to-date, higher than the S&P 500's 5.5% gain over the same period. Calculated in US dollars, the Toronto index rose 15%, putting it on par with other gold-heavy global indices.

Sadiq Adatia, chief investment officer at BMO Asset Management Inc., attributes this strong performance to gold, stating, "There's no question it's being driven by gold."

Gold as a Safe Haven

As investors flocked to gold and precious metals mining stocks to hedge against risks from President Trump's trade threats and geopolitical tensions in the Middle East, the Canadian stock index benefited from this trend. "You need assets that are 'bulletproof' for your portfolio, and gold is the best option," Adatia added.

Precious Metals Sector's Impact

Gold and silver stocks contributed half of the S&P/TSX Composite Index's gains through June 18. Scotiabank analyst Simon Fitzgerald-Carrier described this rally as "extraordinary," driven by "high uncertainty surrounding US tariffs and their potential impact on economic growth."

Among the top ten best-performing stocks in the first half of the year, four were precious metals stocks, including Agnico Eagle Mines Ltd. and Wheaton Precious Metals Corp. Furthermore, the majority of the top ten performing stocks in the index were precious metals mining companies, led by Lundin Gold Inc. with a gain of nearly 135%.

With geopolitical and trade risks subsiding at the end of June, gold prices fell. The question now is: will the gold-led rally fade? BMO's Adatia believes that "gold is not going to have the same performance in the second half of the year as it did in the first half, because a lot of the ambiguity and uncertainty that we faced earlier has subsided."

Energy Sector Challenges

Bloomberg Intelligence strategist Gillian Wolff, in her June 11 report, anticipates a "significant" decline in earnings forecasts for S&P/TSX constituents since April, largely due to the index's exposure to the "struggling energy sector," which is disproportionately dragging down overall forecasts.

Future Growth Drivers

However, Lesley Marks, chief investment officer of equities at Mackenzie Investments, points to other growth opportunities in Canadian stocks, beyond the influence of gold. She says that global investors are pouring money into the Toronto Stock Exchange due to the significant weighting of materials, energy, and financial sectors.

Marks adds that Canada's new Prime Minister, Mark Carney, is "advocating a very pro-investment, pro-growth, economically-centric mandate." She also points out that the price-to-earnings ratio for the S&P/TSX is 17x, significantly lower than the S&P 500's 24x. Marks concludes, "I think that Canadian equities have a fundamental story, as well as a valuation story, because of the changes in our government's policies."