BMO's Outlook on the Canada-U.S. Trade Relationship: Navigating Geopolitical and Regulatory Risks in Energy and Manufacturing

The Canada-U.S. trade relationship has long been a cornerstone of economic stability for both nations, but 2025 has brought unprecedented volatility. Escalating tariffs on energy, steel, aluminum, and autos have disrupted supply chains, with goods exports to the U.S. dropping 15.7% in April 2025 compared to pre-tariff levels, according to a Statistics Canada report. While a slight recovery emerged in June, year-over-year exports remain 12.5% lower than in June 2024, the Statistics Canada report said. For investors, the evolving dynamics between these two economies-particularly in energy and manufacturing-pose critical questions about resilience, adaptation, and long-term value. BMO Financial Group's recent financial performance and strategic moves offer a lens through which to assess these risks and opportunities.

Energy Sector: A Double-Edged Sword

Canada's energy exports to the U.S. are both a lifeline and a vulnerability. In 2023, hydrocarbon exports to the U.S. totaled $163 billion, representing 21% of Canada's total goods exports, the Statistics Canada report found. Crude oil alone accounted for 69.4% of this value, with 60% of U.S. crude oil imports sourced from Canada, the report noted. However, 2025 has introduced new headwinds. U.S. tariffs on Canadian energy products, coupled with retaliatory measures like Canadian duties on U.S. auto imports, have created a trade standoff, according to the 2025 Energy Outlook.

Geopolitical risks further complicate the outlook. The potential return of a Trump-led U.S. administration in 2025 introduces uncertainty around regulatory frameworks, environmental policies, and international energy alliances, a point raised in the 2025 Energy Outlook. BMO analysts project that WTI crude oil prices will average $71.25 per barrel in 2025, supported by sustained global demand but tempered by supply management challenges, per the Energy Outlook. Meanwhile, the Canadian dollar is forecast to average 0.705 USD, influenced by oil and gas revenues and the resolution of political uncertainties, as noted in the Energy Outlook.

For energy infrastructure projects like LNG Canada, the stakes are high. BMO has noted that the Canadian election outcome could have mixed implications for midstream energy companies, depending on their exposure to domestic versus cross-border operations in a Globe and Mail article. Investors must weigh these geopolitical risks against the sector's long-term fundamentals, including the global demand for LNG and Canada's role as a stable supplier.

Manufacturing Sector: Tariffs and Adaptation

The manufacturing sector has borne the brunt of the trade tensions. U.S. tariffs on Canadian steel and aluminum have increased production costs, with 69.1% of exporters anticipating cost-related obstacles, the Statistics Canada report showed. Over 55% of Canadian businesses exporting to the U.S. expect tariffs to negatively impact their operations, and 90.2% of manufacturing firms plan to take mitigation actions, according to an SFI blog post. These disruptions are not merely short-term; they signal a structural shift in how supply chains are managed.

BMO's economic outlook underscores the fragility of the current environment. While broader economic stability is emerging, trade uncertainties remain a "significant risk," according to its third-quarter 2025 results. For manufacturers, diversification and nearshoring could become strategic imperatives. However, such shifts require capital investment and time-factors that may strain smaller firms.

BMO's Financial Resilience and Strategic Moves

Amid these challenges, BMO Financial Group has demonstrated resilience. Its third-quarter 2025 results revealed a 25% increase in net income and a 26% rise in earnings per share (EPS) compared to 2024. The U.S. segment, in particular, outperformed, with net income up 51% year-over-year, driven by higher net interest income and cost reductions. CEO Darryl White emphasized investments in digital and AI capabilities to enhance client experiences, signaling a proactive approach to navigating trade uncertainties.

BMO's decision to repurchase up to 30 million common shares further underscores its confidence in returning excess capital to shareholders while maintaining a strong balance sheet. This strategy aligns with the bank's broader focus on long-term growth, even as it acknowledges the risks posed by trade disputes and geopolitical shifts.

Historical data on BMO's earnings performance reveals mixed signals for investors. Since 2022, there have been nine instances where BMO beat earnings expectations, according to a backtest of BMO earnings. While the stock showed a high 1-day win rate (≈78%) following these events, the short-lived edge faded rapidly. By day 30, the median gain was only 1.4% versus 0.6% for the benchmark, with no statistically significant outperformance across holding periods. This suggests that while positive earnings surprises may generate immediate market optimism, they do not consistently translate into durable alpha. Investors should therefore view BMO's earnings performance as one of many factors, rather than a standalone signal for long-term positioning.

Future Outlook: Balancing Risks and Opportunities

The path forward hinges on resolving political and tariff-related uncertainties. BMO analysts project that the Canadian dollar's trajectory will depend on the resolution of these tensions and the success of major infrastructure projects, as outlined in the Energy Outlook. For energy and manufacturing sectors, diversification and innovation will be key.

Investors should monitor two critical factors:
1. Policy Developments: The outcome of the U.S. election and Canada's federal election could reshape trade policies and regulatory environments, as discussed in the Energy Outlook and a Globe and Mail article.
2. Market Fundamentals: Global demand for energy and manufactured goods will remain a stabilizing force, provided supply chains adapt, according to the Statistics Canada report and the Energy Outlook.

Conclusion

The Canada-U.S. trade relationship in 2025 is a study in contrasts: a vital economic partnership strained by tariffs and geopolitical risks. For BMO, the challenge lies in balancing these risks with opportunities in energy and manufacturing. While the immediate outlook remains uncertain, the bank's financial resilience and strategic adaptability position it as a key player in navigating this complex landscape. Investors must remain vigilant, but the long-term fundamentals of North American trade suggest that stability-and growth-could yet emerge from the turbulence."""