Assessing the Impact of Rising Unemployment on Canadian Equities and Policy Outlook

The Canadian labor market entered 2026 with a complex mix of resilience and fragility. By December 2025, the unemployment rate had climbed to 6.8%, the highest since 2016, excluding pandemic years, driven by trade-related uncertainties and U.S. tariffs. Youth unemployment surged to 13.3%, while employment gains in healthcare and social assistance (+21,000 jobs) contrasted with losses in professional services (-18,000 jobs) and accommodation. As the Bank of Canada prepares its January 2026 policy decision, investors must navigate these dynamics to identify sectors best positioned to weather macroeconomic headwinds.

Sectoral Resilience: Healthcare vs. Professional Services

Historical data underscores a stark divergence between healthcare and professional services during unemployment surges. From 2016 to 2025, the healthcare sector consistently added jobs, even amid trade tensions. In December 2025, it gained 21,000 positions, reflecting its essential role in the economy. Conversely, professional services-particularly scientific and technical industries- faced a 1.3% employment decline in August 2025, exacerbated by U.S. tariff pressures. This contrast highlights healthcare's structural resilience, as demand for medical services remains inelastic to economic cycles, while professional services are more exposed to trade-sensitive supply chains according to Conference Board analysis.

The S&P/TSX Healthcare sector's performance, however, has been mixed. While employment data suggests strength, stock returns in 2025 erased gains from 2024, with half of its constituents suffering double-digit losses. This volatility underscores the sector's sensitivity to broader economic conditions, such as interest rates and inflation, even as employment fundamentals remain robust. Meanwhile, the Professional Services sector's stock returns were not explicitly quantified in available data, but its employment trends- marked by part-time job losses and trade-related disruptions-signal vulnerability.

Policy Outlook: A Cautious Hold with Long-Term Tightening Risks

The Bank of Canada maintained its policy rate at 2.25% in December 2025, with Governor Tiff Macklem stating the rate was "about the right level" to keep inflation near 2%. The central bank projected continued economic growth in 2026, albeit with quarterly volatility due to trade dynamics. However, analysts anticipate a 50-basis-point tightening by late 2026, driven by potential inflationary pressures from energy and food prices.

This cautious stance reflects a balancing act: while the labor market shows uneven recovery-part-time job gains have offset some unemployment declines-the Bank of Canada remains wary of trade-related uncertainties. For instance, the U.S. tariffs on Canadian goods have disproportionately impacted manufacturing and natural resources, sectors accounting for 9.3% of total employment in 2024. Regions like Windsor–Sarnia, heavily reliant on export-oriented industries, saw unemployment spike to 10.0% in Q3 2025, underscoring regional disparities that could influence future policy.

Strategic Positioning for 2026

Investors should prioritize sectors with structural resilience while hedging against potential policy shifts. Healthcare, despite its stock market volatility, remains a defensive play. Its employment gains during unemployment surges- such as the 20,800 jobs added in December 2025-suggest long-term stability, supported by demographic trends and public policy focus. Conversely, professional services and trade-sensitive sectors like manufacturing face near-term headwinds, with employment declines likely to persist amid U.S. tariff pressures.

For equities, an overweight in healthcare and underweight in professional services aligns with historical trends. However, investors must also monitor the Bank of Canada's inflation forecasts. If core inflation exceeds 2.5% in early 2026, as some models predict, a rate hike could pressure high-debt sectors like real estate and utilities. Defensive plays in healthcare and utilities-despite recent job losses in the latter-may offer dual protection against both unemployment and interest rate risks.

Conclusion

The Canadian equity landscape in 2026 will be shaped by two forces: sectoral resilience and monetary policy. Healthcare's ability to absorb labor market shocks contrasts sharply with the fragility of professional services, which remains tethered to trade-sensitive supply chains. Meanwhile, the Bank of Canada's cautious stance-likely to hold rates steady in January 2026-provides a temporary buffer, but long-term tightening risks loom. Investors who position portfolios to capitalize on healthcare's inelastic demand and hedge against trade-related disruptions will be best poised to navigate the year's uncertainties.