A BMO strategist and a Picton manager answer the question
Advisors who turned bullish on Canada this year cannot buy that view through the country’s benchmark index.
The S&P/TSX Composite carries 69.1 percent of its weight in financials, energy, and materials, and 0.3 percent in health care, according to sector weights published by S&P Dow Jones Indices as of July 31. The sectors Ottawa is moving to spur, manufacturing, capital equipment, and infrastructure, sit at the thin end of the index. The measure doing the spurring is not law yet.
Six in 10 advisors told Fidelity’s Advisor Pulse Poll they are more bullish on Canada than a year ago, and four in 10 pointed to the new policy direction, as Wealth Professional reported on the poll results last week.
“This is difficult. The TSX has very little ‘Main Street’ Canada exposure,” said Brent Joyce, chief investment strategist and managing director at BMO Private Wealth, in an email to Wealth Professional.
Prime Minister Mark Carney announced the Productivity Mega Deduction at the 2026 investment summit. It would permanently extend immediate expensing to cover about two-thirds of capital asset investment, up from roughly 15 percent, and takes effect only if the November 5 budget passes.
The Department of Finance Canada backgrounder puts the marginal effective tax rate on new business investment at 6.4 percent under the measure, down from roughly 13 percent.
Wealth Professional asked how to reach the Canadian economy rather than the Canadian stock market, and what could undo the bullish case.
Why the TSX is not the Canadian economy
“There are telcos, grocers, auto parts, dairy products, forestry companies, steel companies, and the like, but these represent very small weights in the benchmark index, accounting for less than 10 percent combined,” Joyce said.
Most managed products will not carry significant exposure as a result, according to the strategist, and an investor may have to buy these sorts of stocks individually.
“Banks, life insurance companies, energy producers, mining, and minerals are all part of the ‘Canadian economy,’ and proudly we have some world-class companies that operate and compete globally in these industries,” he told Wealth Professional.
Joyce said exports drive much of what the forestry, food products, and auto parts companies earn.
"While one might think the small-cap space in Canada represents more of a broad swath of the Canadian economy, it is actually heavily dominated by resource companies," said Joyce.
Where the tailwinds sit
Geoff Phipps, portfolio manager and trading strategist, equity, at Picton Investments, named energy, infrastructure, and pipelines first in his emailed response to Wealth Professional.
“Faster approvals through the Major Projects Office and new tax write-offs make energy infrastructure cheaper and quicker to build. More takeaway capacity and access to non-US markets help midstream operators and SAGD oil sands producers with long-life, low-decline assets, and parts of energy services,” Phipps said.
Capital goods and equipment benefit directly from the deduction, he said, with the Bank of Canada’s business survey describing investment plans as robust. “The 28 projects referred to the Major Projects Office include ports, mines, power lines and Arctic roads.”
Nickel, graphite, and tungsten mines sit in the federal projects pipeline, according to Phipps, who said of the sector that “Gold is well off its January high, so this is a quality call rather than a momentum one.”
On power, he said, “Electrification and data-centre demand support power generation and transmission,” while rate-sensitive utilities may keep struggling with yields high.
What the index does not give advisors
“S&P 500 or US mid cap would stand out. These indices complement the financials and resource heavy Canadian market with technology, communication services, health care exposures that are much smaller on the TSX,” Joyce said in his emailed response.
Industrials, consumer goods, materials, and utilities are more diversified in the US setting and can complement a Canadian stock portfolio, the strategist said.
His answer to a question about Canadian exposure points south of the border, which is itself a measure of how little of the domestic economy the benchmark holds.
Risks to the bullish case on the Canadian economy
US tariffs on Canadian cars, trucks, auto parts, and steel are set to rise to 50 percent on January 1, 2027.
Bank of Canada governor Tiff Macklem has said the tariffs could cut fourth-quarter growth roughly in half, to below 1 percent, a figure Phipps flagged as the main threat to the bullish case.
Canada shed 42,000 jobs in August and 68,000 in September, according to Statistics Canada’s Labour Force Survey, with unemployment at 6.5 percent. Phipps attributed the decline to public sector positions being cut.
Headline inflation reached 3.1 percent in September, up from 3.0 percent in August, according to Statistics Canada’s consumer price index.
Consumer and business inflation expectations are trending higher alongside tariff effects, Phipps said.
Markets are pricing roughly 75 to 90 percent odds of a move to 2.50 percent when the Bank of Canada decides on October 28, he said, against what he called a fairly tepid economy.
“Most federal projects have only been referred, not approved,” Phipps said.
Pacific Link’s final conditions are not due until September 2027, LNG Canada Phase 2 could take years to build, and the deduction remains a proposal until the November 5 budget, according to the portfolio manager.
“Less of a risk to the Canadian economy and more of a risk to the Canadian stock market is the possibility that the geopolitical struggles across the globe get resolved or situations improve,” Joyce said.
That outcome “would be a welcome development broadly,” he said, but it should reduce the risk premium currently sitting in energy and other commodity prices.
Oil, gold, and other commodity prices could retreat along with share prices if that happens, Joyce said, though over the longer term he sees it as inherent volatility rather than a major setback.
