Canadians' Contradictory Love for U.S. Stocks Amid Trump's Trade War

The Canadian investor's relationship with U.S. equities has long been a paradox of proximity and pragmatism. Despite the Trump-era trade war's escalating tariffs and geopolitical friction, Canadian capital continues to flow into American stocks. This contradiction—between nationalism and financial logic—reveals a deeper tension between short-term political anxieties and long-term economic realities. To understand this dynamic, we must dissect the interplay of investor behavior, macroeconomic dissonance, and the structural forces that bind North American markets.

The Allure of U.S. Equities: Market Size and Historical Performance

The U.S. equity market remains the gravitational center of global finance. Its sheer size—accounting for over 50% of global market capitalization—offers unparalleled liquidity and diversification. For Canadian investors, this is not just a matter of habit but a strategic imperative. The S&P 500 has historically outperformed the S&P/TSX Composite Index by a margin of 2-3 percentage points annually, a gap that has only widened in recent years. Even as the TSX surged 9.5% in 2025 compared to the S&P 500's 6.8%, the U.S. benchmark's dominance in sectors like technology and healthcare continues to attract capital.

This performance gap is amplified by the U.S. dollar's strength. A weaker Canadian dollar, driven by divergent monetary policies and trade deficits, makes U.S. equities cheaper for Canadian investors. For example, a 10% return on a U.S. stock becomes a 12% return when factoring in a 2% CAD/USD appreciation. This currency arbitrage has long been a silent driver of cross-border investment flows, even as political rhetoric grows more hostile.

Macroeconomic Dissonance: Trade Tensions vs. Corporate Fundamentals

The Trump administration's 2023 tariff war created a rift between political rhetoric and economic reality. While tariffs on Canadian steel and aluminum hurt domestic industries, U.S. corporate earnings remained resilient. Tech giants like Apple and Microsoft, which dominate the S&P 500, reported record profits in 2024, driven by AI-driven demand and global supply chains. Canadian investors, particularly institutional players, have focused on these fundamentals rather than the noise of trade wars.

Sun Life Financial's data underscores this divide: while 47% of Canadians wanted pension funds to reduce U.S. holdings, the same investors continued to allocate capital to American equities through defined contribution plans. This dissonance reflects a broader truth: retail investors often act on sentiment, while institutional investors prioritize long-term value. The latter group recognizes that U.S. equities are less exposed to trade policy than Canadian exporters, which face direct tariffs and retaliatory measures.

ESG as a Mitigation Strategy

A critical factor in sustaining Canadian interest in U.S. equities is the integration of ESG (Environmental, Social, and Governance) criteria. Canadian institutional investors have quietly deepened their focus on sustainability, aligning with the International Sustainability Standards Board (ISSB) and demanding Scope 3 emissions disclosures from U.S. companies. This shift has created a new layer of resilience: firms with strong ESG profiles, such as Tesla and NextEra Energy, have outperformed their peers during periods of trade uncertainty.

For example, the BMO MSCI USA ESG Leaders ETF (ESGY) attracted significant inflows in 2024 despite a C$1.9 billion outflow in Q2. This volatility highlights the dual role of ESG as both a risk hedge and a performance driver. Canadian investors are increasingly viewing ESG as a tool to navigate trade-related disruptions, particularly in energy and manufacturing sectors.

Sustainability of the Trend: A Delicate Balance

The question of sustainability hinges on three factors: trade negotiations, monetary policy divergence, and geopolitical risks.

1. Trade Negotiations: The renegotiation of the USMCA in 2026 could either stabilize or exacerbate tensions. A resolution that rolls back tariffs would likely see a rebound in Canadian investor confidence. Conversely, a failure to address trade imbalances could accelerate the shift toward domestic equities.
2. Monetary Policy: The Bank of Canada's aggressive rate cuts in 2025 (projected to cut rates by 150 basis points) will weaken the CAD, making U.S. equities more attractive. However, this also increases the risk of capital flight if inflationary pressures persist.
3. Geopolitical Risks: U.S.-China tech decoupling and Middle East conflicts could disrupt global supply chains, indirectly affecting U.S. equities. Canadian investors must weigh these risks against the potential for U.S. market resilience.

Long-Term Implications for Cross-Border Allocation

The current phase of trade tensions is likely to accelerate a structural shift in Canadian asset allocation. While U.S. equities will remain a core holding, the proportion of domestic and global equities is expected to rise. The Caisse de Dépôt et Placement du Québec's decision to “trim a bit” of its U.S. exposure reflects this trend. Over the next decade, Canadian pension funds may adopt a more balanced approach, allocating 40-50% to U.S. equities, 20-30% to Canadian stocks, and 20-30% to global markets.

This reallocation will have knock-on effects for regional equity performance. The TSX's outperformance in 2025 suggests that Canadian equities, particularly in energy and mining, could continue to attract capital. However, the U.S. market's dominance in innovation and scale will ensure its relevance, especially for Canadian investors seeking exposure to AI, semiconductors, and renewable energy.

Investment Advice: Diversify, Hedge, and Stay Agile

For Canadian investors, the key takeaway is to adopt a nuanced strategy:
- Diversify: Allocate across sectors and geographies to mitigate trade-related risks. Prioritize U.S. equities with strong ESG profiles and global revenue streams.
- Hedge: Use currency forwards or ETFs to offset CAD/USD volatility.
- Stay Agile: Monitor trade negotiations and geopolitical developments. Rebalance portfolios in response to policy shifts, such as the USMCA renegotiation or U.S. tariff rollbacks.

The contradiction between Canadian nationalism and U.S. equity investment is not a flaw but a reflection of the complex interplay between politics and economics. As long as the U.S. market offers liquidity, innovation, and returns, Canadian investors will continue to navigate the trade war's turbulence with a mix of caution and conviction. The future of cross-border investing lies in balancing these forces—not in choosing one over the other.