Assessing the Resilience of Canadian Equities Amid Labour Market Stabilization

The Canadian equity market is navigating a pivotal inflection point as RBC's September 2025 analysis forecasts a stabilization in the country's labour market after a period of underperformance in late 2024. This stabilization, driven by the lagged effects of aggressive Bank of Canada (BoC) rate cuts, presents both challenges and opportunities for investors seeking to align their portfolios with evolving macroeconomic dynamics. By examining sector rotation and cyclical positioning strategies, we can assess the resilience of Canadian equities in this shifting landscape.

Labour Market Stabilization: A Mixed Outlook

According to RBC Economics, Canada's job market added only 10,000 positions in December 2024, a stark contrast to the U.S.'s 195,000 gain during the same period. While the unemployment rate has risen by 0.5 percentage points over the past year, it remains historically low. The anticipated normalization in 2025 is attributed to the BoC's rate cuts, which are expected to offset slower population growth-a key constraint on labour force expansion. However, wage growth is projected to decelerate as job openings decline, signaling a potential drag on consumer spending and corporate margins.

This mixed outlook underscores the need for investors to recalibrate their strategies. Sectors reliant on wage-driven demand, such as consumer staples and services, may face headwinds. Conversely, industries benefiting from infrastructure investments or energy transitions could gain traction.

Sector Rotation: Tech Dominance and Diversification Trends

RBC's September 2025 Equity Sector Rotation Chartbook highlights a continued dominance of technology stocks, particularly within the S&P 500, with telecommunications services (XLC) and technology (XLK) sectors exhibiting strong relative returns and momentum. The AI-driven rally is further bolstered by U.S. government investments in technology and accommodative monetary policy. However, the report cautions that overconcentration in tech could expose portfolios to volatility, especially as macroeconomic conditions evolve.

For Canadian equities, the interplay between domestic and global trends is critical. While Canadian tech firms may benefit from spillover demand in the U.S. market, they also face domestic challenges such as subdued hiring and wage growth. Energy, on the other hand, is emerging as a rising star, with RBC noting its potential to outperform amid global energy transitions and geopolitical risks. International equities are also gaining traction, reflecting a broader diversification away from a U.S.-centric, tech-led rally.

Cyclical Positioning: Balancing Growth and Value

RBC Global Market Outlook 2025 emphasizes the importance of adapting to macroeconomic forces such as inflation, interest rates, and geopolitical shifts. Investors are advised to rebalance portfolios toward value, international, and cyclical sectors to mitigate risks associated with a potential slowdown in growth-driven assets.

In Canada, this strategy could involve increasing exposure to energy and materials sectors, which are poised to benefit from infrastructure spending and commodity demand. Meanwhile, healthcare and consumer staples-sectors showing relative weakness-may present contrarian opportunities if wage growth stabilizes and consumer confidence rebounds.

Investment Implications

The stabilization of Canada's labour market in 2025 offers a nuanced backdrop for equity investors. While the BoC's rate cuts provide a tailwind for cyclical sectors, the lingering effects of slower wage growth and subdued hiring demand necessitate a balanced approach. Investors should prioritize sectors aligned with macroeconomic tailwinds (e.g., energy, AI-driven tech) while hedging against overexposure to growth-centric assets.

Moreover, the diversification trends highlighted by RBC-toward international equities and value sectors-suggest that Canadian investors should not overlook global opportunities. As tariff regulations and geopolitical risks reshape trade dynamics, a stock market rotation primer suggests a geographically diversified portfolio could enhance resilience.

Conclusion

The resilience of Canadian equities in 2025 hinges on a dual focus: leveraging the normalization of the labour market and navigating sector rotation dynamics. By aligning portfolios with cyclical positioning and diversification strategies, investors can capitalize on emerging opportunities while mitigating risks. As RBC's analysis underscores, the path forward requires agility, with a keen eye on both domestic and global macroeconomic signals.