Despite challenges, Canada is poised to outperform in 2025

The setup for Canadian equities is as compelling as it has been in years, says Craig Jerusalim, senior portfolio manager at CIBC Asset Management.

Speaking on the latest episode of the Advisor to Go podcast, Jerusalim said he expects the premium between the two indexes to narrow in 2025, either by the TSX multiple going up, or the S&P 500 multiple coming down.

“Either way, that spells out [an] outperformance for the Canadian benchmark,” he said.

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Jerusalim said despite the challenges of slow population growth, weak productivity and political challenges, Canadian equities show promise, supported by lower prices, higher dividend payouts, and growth in key sectors like energy, renewables and nuclear power.

Even with the dominance of large U.S. tech companies, Jerusalim said Canadian stocks have the potential to perform better than U.S. equities in 2025, thanks to their strong fundamentals, attractive yields, and diverse growth opportunities.

He noted that Canadian equities, represented by the S&P/TSX, have performed on par with the U.S. S&P 500 since late 2021, with both showing total returns of around 30%. However, he noted a key difference: much of the U.S. market’s growth has relied on rising valuations, while Canadian stocks have been driven by stronger fundamentals.

For 2025, the S&P/TSX is expected to deliver low-double-digit earnings growth with profit margins near 9%. This is close to the 13% earnings growth and 10% profit margins forecasted for the S&P 500 but comes with the advantage of much lower valuations.

He said this highlights the potential for Canadian equities to close the valuation gap.

Jerusalim also noted that Canadian stocks offer an average dividend yield of nearly 3%, more than double that of U.S. equities. 

“That yield advantage offers a nice safety net if the market becomes more volatile and takes a turn for the worse,” Jerusalim said. 

Energy is one of the most promising sectors, Jerusalim said, pointing to companies like Canadian Natural Resources, which are well-positioned due to low costs and strong cash flow.

“Given the decades-long mine lives of the oil sands, companies like Canadian Natural Resources will be amongst the last producers standing no matter how long the energy transition takes,” he said.

In nuclear energy, Cameco is a top pick, supported by rising global demand for clean energy. 

“Cameco has combined commodity exposure with the predictability of their Westinghouse servicing business, resulting in leveraged growth for many years to come,” he said.

Jerusalim noted that the renewable energy sector also offers significant opportunities. He said Brookfield Renewable is a standout for its premium assets, global diversification, and consistent double-digit growth in funds from operations. 

“Brookfield Renewable has been lumped in with other depressed renewable stocks, but it has premium assets and the unique capability to recycle assets globally to enhance their returns,” Jerusalim said.

While Canadian equities show strong potential overall, Jerusalim said certain sectors could face headwinds. For example, companies dependent on Canadian consumers, such as grocery stores and telecommunications providers, could struggle. 

“The Canadian consumer is really at a disadvantaged position relative to the strong U.S. consumer right now,” Jerusalim said. 

However, he noted that Telus is an exception. With reduced capital spending and plans to increase shareholder returns through buybacks and dividends, Telus stands out as a solid investment compared to its peers. 

“Telus’ declining capital expenditures and increasing free cash flow set it apart from competitors like BCE and Rogers,” Jerusalim said.

For 2025, Jerusalim said the key for investors will be to focus on earnings growth. 

“As long as earnings continue to grow double digits, like they are in Canada and the U.S., multiples can stay high,” Jerusalim said. 

While small pullbacks of 5% to 10% are common, deeper declines are typically linked to recessions or major economic shocks, which Jerusalim does not anticipate next year.

In this environment, Jerusalim said investors should prioritize companies with strong fundamentals and be selective within weaker sectors. 

“The key will be to follow the earnings as the best advice we can give for investors looking forward into 2025,” Jerusalim said.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.