Why Canadian Equities May Outperform U.S. Tech-Heavy Indexes for Years to Come in the AI Era

The AI revolution has turned the Nasdaq Composite into a poster child for speculative fervor, with its valuation metrics flirting with the extremes of the dot-com bubble. As of September 2025, the Nasdaq-100-based Invesco QQQ Trust trades at a P/E ratio of 59.27x—more than double its 10-year median of 25.8x—while the broader Nasdaq Composite hovers near 30x [1]. By contrast, the S&P/TSX Composite, a diversified barometer of the Canadian market, sports a P/E ratio of just 10.5x, a level many analysts describe as “undervalued” [2]. This stark valuation gap isn’t just a statistical curiosity—it’s a golden opportunity for investors willing to bet on market rotation and the long-term arithmetic of value.

The Overvaluation Overhang in U.S. Tech

The U.S. tech sector’s AI-driven euphoria has created a self-fulfilling prophecy. Firms like NVIDIA and Microsoft, with forward P/Es of 31x and 33x respectively, are still seen as “reasonably priced” despite the Nasdaq 100’s overall P/E of 33.61x [3]. But when the Schiller P/E for the S&P 500—a cyclically adjusted metric—reaches levels last seen in 1999, it’s a red flag. As BlackRock notes, the Nasdaq’s performance is increasingly driven by a handful of “Magnificent Seven” stocks, whose dominance has pushed the index into a precarious state of overvaluation [4]. History suggests that when valuations diverge this sharply from fundamentals, the music eventually stops.

Canadian Equities: The Undervalued Counterbalance

While the U.S. fixates on AI, Canada is quietly building a foundation for sustainable growth. The S&P/TSX Composite’s 10.5x P/E ratio reflects a market less reliant on speculative AI bets and more grounded in resource sectors, financials, and global trade [5]. Yes, trade tensions under the Trump administration have rattled Canadian exporters—aluminum and lumber prices swung wildly in H1 2025—but these headwinds are temporary. Meanwhile, Canada’s $2.4 billion AI investment plan is starting to bear fruit, creating a pipeline of adopters who could benefit from U.S. innovations without paying the premium [6].

The valuation arbitrage here is compelling. At a P/B ratio of 1.68x, the TSX Composite is trading at a discount to its own historical norms, let alone the Nasdaq’s 3.6x [7]. This isn’t just a Canadian discount—it’s a discount on the future. As BlackRock’s 2025 Fall Investment Directions report argues, investors are increasingly seeking diversification away from U.S. growth stocks, which now dominate global equity portfolios [8]. Canadian equities, with their lower correlations to AI-driven tech cycles, offer a hedge against the volatility of overvalued U.S. indexes.

The Long Game: Why This Isn’t a Fad

Critics will argue that the U.S. will always lead in AI innovation. And they’re right—American firms still produce the world’s top AI models. But China’s rapid catch-up and the U.S. sector’s valuation extremes mean the days of “buy and hold” tech are numbered. Canadian investors, meanwhile, are positioned to capitalize on two trends:
1. Valuation Mean Reversion: The TSX’s 10.5x P/E is 60% below its 10-year average of 26x. If it normalizes, even conservative estimates suggest 50%+ total returns over the next five years.
2. AI Adoption, Not Just Innovation: Canada’s focus on applying AI to industries like energy, healthcare, and manufacturing could unlock value without requiring the astronomical R&D costs of building AI from scratch [9].

Conclusion: Time to Rebalance

The Nasdaq’s AI-driven rally has created a market where growth is priced in—and then some. For investors with a multiyear horizon, the S&P/TSX Composite offers a compelling counterpoint: a diversified, undervalued index with real-world applications for AI and a buffer against U.S. sector-specific risks. As the 2025 AI Index Report from Stanford HAI notes, public optimism about AI remains mixed, with only 39% of Americans seeing it as net positive [10]. In contrast, Canada’s measured approach—funding adoption while avoiding the hype cycle—could position its equities to outperform when the U.S. tech bubble pops.

Source:
[1] Is AI Market Forming a Bubble? Nasdaq-100 ETF in Focus [https://www.nasdaq.com/articles/ai-market-forming-bubble-nasdaq-100-etf-focus]
[2] The Resilience and Growth Potential of the Financial Sector [https://www.ainvest.com/news/resilience-growth-potential-financial-sector-strong-tsx-performance-2508/]
[3] History Says the Nasdaq Will Soar in 2025 [https://www.fool.com/investing/2025/01/01/nasdaq-soar-2025-artificial-intelligence-ai/]
[4] 2025 Fall Investment Directions: Rethinking Diversification [https://www.blackrock.com/us/financial-professionals/insights/investment-directions-fall-2025]
[5] Forecast - 2025 - CC&L Investment Management [https://cclinvest.cclgroup.com/insight/cclim-forecast-2025/]
[6] The 2025 AI Index Report | Stanford HAI [https://hai.stanford.edu/ai-index/2025-ai-index-report]
[7] iShares S&P/TSX Composite High Dividend Index ETF [https://www.blackrock.com/ca/investors/en/products/239846/ishares-sptsx-equity-income-index-etf]
[8] EY Global IPO Trends Q2 2025 [https://www.ey.com/en_gl/insights/ipo/trends]
[9] Analysis of the International Stock Market Situation (2025) [https://isdo.ch/analysis-of-the-international-stock-market-situation-summer-2025/]
[10] The 2025 AI Index Report | Stanford HAI [https://hai.stanford.edu/ai-index/2025-ai-index-report]