TSX runs higher on rate cut expectations
Investing.com -- Investor sentiment surrounding Canada’s trade outlook is undergoing a noticeable shift as speculation intensifies around a potential Canada-U.S. trade deal ahead of the G7 summit in Alberta, scheduled for June 15-17. BMO (TSX:BMO) Capital Markets’ Chief Investment Strategist Brian Belski said that the recent uncertainty tied to tariffs has led to “outlook paralysis” across many Canadian industries sensitive to cross-border commerce.
This climate of caution has had an outsized impact on earnings expectations, which have been revised downward across key trade-exposed sectors, including Auto Components, Leisure Products, Machinery, and Aerospace & Defense. According to BMO’s research, these revisions have created a setup “to under promise and overdeliver” as trade tensions appear to be easing.
Belski highlights the notable divergence between overall market performance and the lagging sectors hardest hit by tariff concerns since tariff-related headlines emerged on November 25, 2024. The S&P/TSX has managed a modest 3.6% rise since then, while sectors like Auto Components and Leisure Products remain in double-digit negative territory.
Price return data underscores the volatility: Auto Components declined 32.2% from late November to the April trough and have only recovered 16.6%, leaving them down 21% overall. Leisure Products and Machinery followed similar trajectories, with peak-to-trough drops exceeding 30% and only partial recoveries since.
Earnings expectations have followed suit, with forecasted EPS for 2025 revised down by as much as 27% for Machinery and 24% for Leisure Products, compared to a more modest 3% decline across the broader index. Belski believes that “current market trends reflect this dynamic,” adding that significant negative revisions now leave room for “a strong revision reversal” in the back half of 2025.
Despite an ongoing recovery since the April low, these sectors remain far below broader index performance benchmarks. BMO’s detailed screen of high-quality names within Industrials and Consumer Discretionary indicates considerable upside if trade conditions stabilize in the months ahead.
As trade negotiations appear to gain momentum ahead of the G7 summit, investor focus is turning toward sectors that have borne the brunt of tariff-related uncertainty. With expectations reset and valuations still trailing the broader market, Canadian trade-exposed industries may be positioned for a meaningful rebound in the second half of 2025.