Canadian stocks posted a strong run in the second quarter of 2025, despite high uncertainty and US President Donald Trump’s trade war. Analysts say the defensive nature of the Canadian market, with its attractive valuations and heavy weighting of financials, helped pull in investors. In a twist, investors pulling money out of the US market and moving into Canadian equities also appears to have helped fuel the gains.

Leading the rally were banks, basic materials, and tech stocks. Meanwhile, energy stocks were among the quarter’s worst performers, as the threat of 10% US tariffs on Canadian oil imports sent them tumbling.

The Morningstar Canada Index managed to track the performance of the Morningstar US Market Index in the second quarter relatively closely, despite the turmoil in world markets. The Canada Index gained 8.1%, while its US counterpart posted gains of 5.4% as measured in Canadian dollars. In the year to date, the Canada Index is up 10.5%, while the US Index is up just 0.6%. The strength of the Canadian dollar against the US currency has worked in favor of Canadian stocks.

What’s Driving the Canadian Stock Market’s Performance?

For Canadian stocks, as elsewhere in the world, headlines were dominated by Trump’s upending of global trade relationships and other geopolitical alignments.

“The tensions between the US and many countries have meant they are having trade wars on multiple fronts, while most countries are just in economic conflict with the US,” argues Ben Jang, portfolio manager at Nicola Wealth. This prompted investors to rotate assets out of US markets and into other geographies, particularly those with more attractive valuations. “Canada fits this mold, starting the year with lower valuations,” Jang says.

David Sykes, TD Asset Management’s chief investment officer, says Canada’s current outperformance is underpinned by its lower starting valuations. He says because Canadian stocks started the year at a much lower valuation base than US equities, they proved “appealing to value investors.”

Observers also attribute the strength to the defensive asset mix of the Canadian equity market, which has significantly less exposure to volatile technology stocks than the market south of the border.

Even without a major market shock, “we are in a lower-growth environment, and Canada’s ripe with higher-dividend-paying companies which are more defensively positioned,” says Jang.

Which Stocks Led the Canadian Market Higher in Q2?

Canadian banks’ robust performance this year has been a significant contributor to the index’s second-quarter gains. Financials, which make up the largest sector weighting of the Canada Index at 33%, led with a contribution of more than 3.98 percentage points to the benchmark’s overall return. Basic materials contributed 1.08 points, while technology added 1.38 points. Technology stocks make up less than 10.00% of the index, while basic materials stocks account for 13.67%.

Royal Bank of Canada RY and Toronto-Dominion Bank TD led the top contributors, adding 0.77 of a percentage point each to the index’s gains, followed by Shopify SHOP (0.71), Cameco CCJ (0.53), and Canadian Imperial Bank of Commerce CM (0.46).

5 Stock Market Laggards in Q2

Sectors that dragged on the index’s second-quarter performance included healthcare, which shaved 0.01 of a percentage point from returns, real estate, which only contributed 0.06 points, and communication services, with 0.08 points. Utilities and consumer cyclicals rounded out the bottom five sectors.

Industrial firm Waste Connections WCN was the quarter’s worst-performing stock, detracting 0.19 percentage points from the index’s returns. The remainder of the five worst performers were predominantly energy stocks, including Suncor SU (which detracted 0.15 points), Pembina Pipeline PPL, and Enbridge ENB, (both of which detracted less than 0.1 points). Rounding out the bottom five is convenience store chain Alimentation Couche-Tard ATD.

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