TSX Performance and Momentum in Late 2025: BMO's Revised Forecasts and Sector Rotation Implications

The Toronto Stock Exchange (TSX) is poised for a pivotal stretch in late 2025, as BMO Capital Markets has revised its year-end target for the S&P/TSX Composite to 28,500—a 15% increase from current levels—while maintaining a cautiously optimistic outlook for Canadian equities relative to their U.S. counterparts. This adjustment, announced by BMO's chief investment strategist Brian Belski, reflects a confluence of factors: Canada's improving growth profile, a narrowing valuation gap with the U.S., and strategic sector rotations that could redefine portfolio positioning for the remainder of the year.

BMO's Rationale: A “Goldilocks” Scenario for Canada?

BMO's optimism hinges on a “Goldilocks” economic environment, where moderate inflation, controlled interest rates, and resilient consumer demand create conditions for balanced growth. According to a report by The Globe and Mail, Belski emphasized that Canada's equity market is “attractive on a relative value basis,” with the TSX projected to deliver a 7% total return by year-end. This forecast contrasts with the S&P 500's revised target of 7,000—a 4.5% increase from its prior estimate—suggesting that while U.S. stocks remain robust, Canadian equities could outperform due to their undervaluation and cyclical momentum.

The Bank of Canada's anticipated rate cuts, expected to reach 2.5% by mid-2025, further bolster this outlook. As BMO's 2025 Canada Economic Outlook notes, falling borrowing costs will alleviate household debt burdens and stimulate consumer spending, particularly in sectors tied to discretionary spending and housing. This dynamic aligns with BMO's sector rotation strategy, which prioritizes growth and income-generating assets over defensive plays.

Sector Rotation: Favoring Growth and Yield

BMO's sector-specific guidance for late 2025 is clear: investors should overweight Consumer Discretionary, Financials, REITs, and Technology, while underweighting Consumer Staples, Utilities, and Health Care. The rationale is rooted in macroeconomic trends and sector fundamentals.

1. Consumer Discretionary and Technology: These sectors are positioned to benefit from a post-pandemic economic rebound and AI-driven productivity gains. BMO highlights the “consistent growth opportunities” in tech, citing advancements in generative AI and cloud infrastructure as tailwinds. Meanwhile, discretionary spending—on travel, luxury goods, and entertainment—is expected to rise as inflation moderates and consumer confidence stabilizes.

2. Financials and REITs: These sectors offer dual appeal through income generation and capital appreciation. BMO notes that Financials, particularly banks, are well-positioned to capitalize on a narrowing net interest margin (NIM) gap as rate cuts materialize, while REITs benefit from a surge in commercial real estate demand driven by e-commerce and industrial logistics.

3. Underweight Sectors: Consumer Staples and Utilities, though traditionally defensive, face headwinds in a high-interest-rate environment. BMO argues that these sectors lack the growth potential to justify their valuations, particularly as consumers shift spending toward discretionary and tech-enabled services.

Portfolio Implications: Diversification and Alternatives

BMO's Q3 2025 ETF strategy underscores a broader shift toward diversification, with alternatives and non-traditional hybrids accounting for 20% of portfolios. This includes allocations to gold, infrastructure, and low-volatility equities, which act as hedges against geopolitical risks and inflationary pressures. The bank's recent acquisition of Burgundy Asset Management further strengthens its wealth management capabilities, enabling clients to access tailored solutions in a fragmented market.

For equity investors, BMO recommends a “neutral” stance on broad markets but advocates for tactical tilts via sector-specific ETFs. Products like the BMO MSCI USA High Quality Index ETF (ZUQ) and BMO Global Infrastructure Index ETF (ZGI) are highlighted as core holdings, offering exposure to high-quality U.S. equities and resilient infrastructure assets.

Risks and Considerations

While BMO's outlook is bullish, investors must remain mindful of macroeconomic uncertainties. Geopolitical tensions, particularly U.S. tariff threats, could disrupt trade flows and dampen Canadian export-dependent sectors. Additionally, the TSX's projected underperformance relative to the S&P 500—though modest—suggests that U.S. equities may still offer superior growth in a prolonged “soft landing” scenario.

Conclusion

BMO's revised forecasts paint a nuanced picture of the TSX in late 2025: one where strategic sector rotations and a focus on alternatives can enhance returns while mitigating risks. By favoring high-growth and income-generating sectors and leveraging tools like sector ETFs, investors can navigate a complex macroeconomic landscape with confidence. As BMO's Q3 results demonstrate, the firm's own digital transformation and capital efficiency initiatives mirror the adaptability required of investors in this evolving environment.