We recommend focusing on stocks with quality characteristics and would add more duration to government bond exposure.
December 2, 2025
By Matt Altro, CFA and Brett Feland
In 2025, the S&P/TSX Composite is on pace to produce one of the better returns among developed country equity markets. The S&P/TSX has advanced despite bouts of volatility and a backdrop of subdued economic growth. Outperformance can largely be attributed to all-time high gold prices and an improving outlook for key market segments including domestic lenders. Furthermore, while U.S.-administered tariffs remain a key overhang on a global scale, the USMCA has provided shelter to many Canadian industries. As the USMCA comes up for joint review next summer, we are hopeful that the current agreement will remain relatively unchanged. We will continue to watch for further discussions between President Donald Trump and Prime Minister Mark Carney on potential relief for the metals and lumber industries.
Under the 2025 federal budget, the government proposed CA$280 billion in increased spending and capital investments over five years. Investments are focused on infrastructure, productivity and competitiveness, defense and security, and housing. The federal government hopes to attract considerable private and other public capital—alongside its own capital—to drive a total of CA$1 trillion in new capital investment.
Current unemployment levels remain elevated, while inflation remains stubbornly above target levels. Despite these conditions, aggregate spending measures suggest the Canadian consumer continues to spend. This dynamic can largely be explained by the economic divide between high- and low-income Canadians. High-income households are doing more than their fair share of consumption, while we expect value-seeking behavior to remain a constant in 2026.
At a multiple of 15.9x price-to-earnings valuation, the S&P/TSX continues to trade at a premium to its long-term historical average valuation multiple of 14.7x. However, this premium is significantly lower than the S&P 500’s 21.3x multiple relative to its long-term average multiple of 16.6x. Premium multiples place a higher hurdle on economic growth and corporate earnings to meet or exceed expectations to drive higher equity values. That said, the modest premium on the S&P/TSX could provide some insulation in a widespread retracement in equity values. Beyond broad-based macro positioning, we continue to endorse businesses with robust balance sheets, sustainable-to-growing earnings profiles, and proven management teams with a track record of enduring market volatility.
The bar chart shows the sector attribution for the S&P/TSX Composite Index’s total year-to-date return of 24.85% as of November 21, 2025. The sector attributions are: Health Care, -0.02%; Real Estate, 0.09%; Consumer Staples, 0.58%; Communication Services, 0.26%; Industrials, 0.24%; Consumer Discretionary, 0.86%; Utilities, 0.79%; Energy, 2.93%; Information Technology, 1.89%; Financials, 8.41%; Materials, 8.81%.
Source – FactSet, RBC Dominion Securities; data as of 11/21/25
Except for a six-month pause in the middle of the year, the Bank of Canada (BoC) continued easing monetary policy throughout 2025. The last two 25 basis point (bps) cuts, in September and October, brought the overnight rate to 2.25 percent, the bottom end of the central bank’s estimated neutral range at which policy is neither restrictive nor stimulative. To support a stumbling labor market and encourage economic growth that has been dampened by U.S. tariff policy, the BoC has delivered a total of 275 bps worth of cuts since the peak in rates in 2023–2024, more easing than any other G7 nation. Unless growth or employment data deteriorates worse than policymakers expect, BoC Governor Tiff Macklem has signaled that the central bank is likely finished easing monetary policy for now.
While cutting the overnight rate has brought short-term Canadian yields lower over the last year, longer-term bond yields have actually moved higher. The yield curve has steepened as term premiums—the additional compensation investors receive for buying longer-term bonds—have risen. Much like other G7 nations, fiscal concerns have placed upward pressure on longer-term bond yields and contributed to this curve steepening. Deficits projected in the federal government’s 2025 budget, released in November, were notably wider than those from the 2024 Fall Economic Statement, as the government announced a series of stimulative measures aimed at supporting economic growth.
This chart shows the Canadian yield curve, plotting Government of Canada bond yields with terms ranging from overnight to 30 years. Two curves are shown, one with data as of November 8, 2024, and one as of November 10, 2025. The chart illustrates how short-term yields have fallen over that time while long-term yields have risen. For example, on November 8, 2024 the overnight, 3-month, 6-month, 1-year, and 2-year yields were at 3.75%, 3.50%, 3.38%, 3.25%, and 3.08%, respectively, while on November 10, 2025 these were at 2.25%, 2.18%, 2.26%, 2.33%, and 2.45%, respectively. Meanwhile, on November 8, 2024, the 20-year and the 30-year yields were at 3.21% and 3.19%, respectively, while on November 10, 2025 these were at 3.51% and 3.62%, respectively.
Source – RBC Wealth Management, Bloomberg
In our view, a steeper yield curve improves the risk/reward profile for taking on a bit more duration in portfolios, as higher starting yields for longer-term bonds help offset the risk of further steepening. On the other hand, credit spreads, the additional yield investors receive for purchasing corporate bonds over government bonds, started 2025 at historically tight levels, and despite our expectations, tightened further throughout the year. We think credit markets may not be fully appreciating issuer risks, and corporate bonds continue to look expensive, in our view. With compensation for credit risk so slim, at this time we prefer to instead take on additional duration risk in portfolios through somewhat longer-term government bonds and remain cautious with respect to corporate bond exposure.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
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