The Implications of the TSX's Record High and Seven-Week Winning Streak for Canadian Equities

The S&P/TSX Composite Index has reached a record high of 29,305.85 points on September 11, 2025, marking a 4.7% annual gain and outperforming U.S. indices2025 Canadian Market Outlook - BMO Private Wealth^[1]. This surge, driven by anticipation of a U.S. Federal Reserve rate cut and a weakening labor market, has extended the index's winning streak to seven consecutive weeksCanadian (TSX) Market Analysis & Valuation - Updated Today^[2]. Yet, beneath this momentum lies a complex interplay of valuation dynamics, economic headwinds, and sectoral shifts that challenge the sustainability of the rally. For momentum investors, the question is not merely whether the TSX can continue its ascent but whether the current trajectory aligns with long-term fundamentals.

Momentum and the Role of Monetary Policy

The TSX's recent performance reflects a strategic recalibration by investors anticipating looser monetary policy. As the U.S. Federal Reserve signals a 25-basis-point rate cut in September 2025, Canadian equities—particularly those in the consumer discretionary and resource sectors—have benefited from a flight to cyclical plays2025 Canadian Market Outlook - BMO Private Wealth^[1]. Magna International's gains, for instance, underscore the market's optimism about a global economic rebound2025 Canadian Market Outlook - BMO Private Wealth^[1]. However, this momentum is inextricably tied to the Bank of Canada's own easing cycle, which projects a reduction in the overnight rate from 5.00% in Q1 2025 to 2.75% by Q3 2026TD Economics - Latest Forecast Tables^[4]. While lower borrowing costs may stimulate growth, they also risk inflating asset prices beyond earnings fundamentals.

Valuation Metrics: A Mixed Picture

The Canadian market's price-to-earnings (PE) ratio of 16.4x and price-to-sales (PS) ratio of 2.1x suggest a modest discount relative to historical averagesCanadian (TSX) Market Analysis & Valuation - Updated Today^[2]. Yet, this apparent value is tempered by the reality that earnings for listed companies have declined by 4.6% annually over the past three years, while revenue growth has stagnatedCanadian (TSX) Market Analysis & Valuation - Updated Today^[2]. BMO Capital Markets' forecast of a year-end target of 28,500 for the TSX—based on earnings of $1,600—appears optimistic given the index's current level of 29,305.852025 Canadian Market Outlook - BMO Private Wealth^[1]. This discrepancy highlights a key tension: the market is pricing in a recovery that has yet to materialize in corporate earnings.

Sectoral Resilience and Structural Risks

BMO's preference for sectors like Consumer Discretionary, Financials, and Technology reflects a focus on growth and consistency2025 Canadian Market Outlook - BMO Private Wealth^[1]. However, the broader economic context complicates this strategy. Canada's GDP is projected to contract by 0.8% in both Q2 and Q3 2025 due to trade tensions and tariffsCanadian economy to contract in the second and third quarters of 2025^[3]. Non-commodity exports remain below pre-tariff levels, and private investment is expected to decline sharply, signaling heightened business uncertaintyCanadian economy to contract in the second and third quarters of 2025^[3]. For momentum investors, this environment demands a nuanced approach: while sectors like energy may benefit from new LNG export capacity, others—such as manufacturing—face persistent headwinds from U.S. tariffs2025 Canadian Market Outlook - BMO Private Wealth^[1].

The Sustainability Dilemma

The TSX's seven-week winning streak raises critical questions about sustainability. On one hand, the index's valuation discount and the anticipated easing of monetary policy provide a tailwind for further gains. On the other, structural challenges—including a 4.6% annual decline in earnings and a contracting real economy—pose a ceiling on long-term momentum. As noted by BMO's Brian Belski, the Canadian market's traditional cyclicality and value orientation may offer advantages in 20252025 Canadian Market Outlook - BMO Private Wealth^[1]. Yet, these advantages are contingent on a synchronized global recovery and a resolution of trade disputes, both of which remain uncertain.

Conclusion: Balancing Momentum and Prudence

For Canadian equities, the current rally represents both opportunity and risk. Momentum investors may capitalize on the TSX's outperformance, particularly in sectors poised to benefit from rate cuts and domestic supply chain adjustmentsCanadian (TSX) Market Analysis & Valuation - Updated Today^[2]. However, the sustainability of this momentum hinges on resolving trade tensions, stabilizing corporate earnings, and aligning valuation expectations with economic realities. As the Bank of Canada navigates its easing cycle and global markets recalibrate to shifting monetary policies, the TSX's trajectory will serve as a barometer for the resilience of Canadian equities in an increasingly fragmented world.