Canadian Equity Market Momentum and the Road to Rate Cuts: Positioning for Near-Term Gains in TSX-Sensitive Sectors

The Canadian equity market has entered a pivotal phase as shifting central bank policy expectations reshape investment dynamics. With the Bank of Canada (BoC) poised to pivot from its cautious stance, investors are recalibrating strategies to capitalize on sectors most sensitive to monetary easing. The BoC’s July 2025 Monetary Policy Report (MPR) underscored a conditional path toward rate cuts, hinging on U.S. trade policy developments and domestic economic data [1]. Recent weak GDP and employment reports have further tilted the odds in favor of a September 2025 rate cut, with market-implied probabilities now at 90% [3]. This analysis explores how equity sectors are likely to respond to this evolving landscape and identifies positioning opportunities for near-term gains.

The BoC’s Conditional Pivot and Market Implications

The BoC’s decision to maintain the policy rate at 2.75% through March 2025 was driven by uncertainty over U.S. tariffs and their inflationary risks. However, the central bank’s three-scenario framework—baseline, de-escalation, and escalation—reveals a nuanced outlook. Under the baseline, Canada’s GDP is projected to grow 1% in late 2025, with stronger momentum in 2026-2027 [1]. Crucially, the BoC has signaled that rate cuts are contingent on data showing sustained economic slack and subdued inflation. Recent back-to-back job losses and a rising unemployment rate (7.1%) have accelerated market expectations for a 25-basis-point cut in September, with two more cuts likely by year-end [3].

This policy pivot is already influencing equity valuations. The S&P/TSX Composite Index has surged 15% year-to-date, outperforming the S&P 500 due to its more attractive valuation and exposure to rate-sensitive sectors [2]. Lower borrowing costs are bolstering consumer spending and business investment, while a weaker Canadian dollar enhances export competitiveness [4]. However, trade tensions and reduced immigration targets remain headwinds, tempering the full impact of monetary easing [4].

Sector Rotation: Winners and Losers in a Rate-Cut Cycle

Historical data and recent performance highlight stark divergences across TSX sectors. Gold and consumer discretionary have emerged as top performers in 2025, with gold-related equities surging nearly 50% year-to-date [1]. This outperformance aligns with the sector’s traditional sensitivity to rate cuts, as lower borrowing costs reduce the opportunity cost of non-yielding assets like gold. Similarly, consumer discretionary stocks have benefited from lower valuation multiples compared to staples, attracting investors seeking growth in a low-rate environment [1].

In contrast, energy and materials have lagged. The energy sector’s 1.29% return in Q2 2025 pales against broader market gains, driven by expectations of increased oil supply and softer demand [4]. Trade-exposed sectors, including manufacturing and transportation, also face headwinds from U.S. tariffs, which have dampened export volumes and corporate earnings [2]. Defensive sectors like utilities and REITs have seen mixed results, with REITs down 27% year-to-date amid rising borrowing costs and economic uncertainty [5].

Positioning for Near-Term Gains

As rate cuts become increasingly likely, investors should prioritize sectors poised to benefit from lower borrowing costs and improved liquidity. Gold and consumer discretionary remain compelling, with gold’s dual role as an inflation hedge and a beneficiary of monetary easing offering asymmetric upside. The Enhanced Value Index, with a P/E of 14.3 and strong ROE, also presents value opportunities for income-focused investors [1].

For defensive positioning, utilities and REITs may rebound if rate cuts materialize, though their near-term outlook remains clouded by trade tensions. Energy and materials, while volatile, could see a rebound if oil prices stabilize and U.S. trade policy de-escalates. However, these sectors require careful risk management given their exposure to global demand shifts.

Risks and Watchpoints

The BoC’s conditional approach means rate cuts are not guaranteed. A surge in inflation or escalation of U.S. tariffs could delay easing, pressuring sectors like manufacturing and materials. Additionally, the Canadian dollar’s strength—projected to rise as the BoC nears the end of its easing cycle—could hurt export-dependent industries [4]. Investors must monitor upcoming CPI and employment data, which will dictate the pace and magnitude of policy shifts.

Conclusion

The Canadian equity market is at a crossroads, with rate-cut expectations creating both opportunities and risks. Sectors like gold and consumer discretionary are well-positioned to capitalize on monetary easing, while trade-exposed industries face near-term challenges. As the BoC navigates a fragile economic landscape, disciplined sector rotation and macroeconomic vigilance will be key to unlocking near-term gains.

**Source:[1] Bank of Canada holds policy rate at 2¾% [https://www.bankofcanada.ca/2025/07/fad-press-release-2025-07-30/][2] Karen Robertson - September 2025 Update [https://ca.rbcwealthmanagement.com/karen.robertson/blog/4636062-September-2025-Update/][3] 'Exceptionally weak' jobs report prompts markets ... [https://www.theglobeandmail.com/investing/markets/inside-the-market/article-market-based-odds-of-boc-rate-cut-this-month-zoom-to-90-after-weak/][4] Canadian economic outlook for 2025 [https://www.bdc.ca/en/articles-tools/blog/canadian-economic-outlook-for-2025-when-optimism-meets-uncertainty][5] Canada Stock Market Index (TSX) - Quote - Chart [https://tradingeconomics.com/canada/stock-market]