The TSX's Record Run: Is This the Moment to Buy Canada’s Real Asset Stars?

The Toronto Stock Exchange (TSX) has delivered a robust performance in 2025, driven by a confluence of factors: a resumption of the U.S. Federal Reserve’s easing cycle, the Bank of Canada’s cautious but clear pivot toward monetary easing, and the resilience of Canada’s commodity-linked sectors. With the Bank of Canada maintaining its overnight rate at 2.75% in August 2025 while signaling two to three rate cuts by year-end [1], investors are increasingly turning their attention to real asset stars—particularly energy, mining, and critical minerals—positioned to benefit from lower borrowing costs and a weaker Canadian dollar.

The Monetary Easing Tailwind

The Bank of Canada’s forward guidance underscores its openness to further rate cuts if labor market data weakens or trade tensions escalate [1]. Economists project the policy rate could drop to 2.25% by year-end, with some scenarios suggesting a potential 50-basis-point reduction by early 2026 [2]. This easing cycle is critical for commodity-linked sectors, as lower interest rates reduce capital costs for resource producers and enhance the appeal of Canadian dollar-denominated assets. Historically, a 100-basis-point drop in real two-year interest rates has led to a 3.5% increase in aggregate commodity prices [1], a trend amplified by the Canadian dollar’s depreciation, which makes exports more competitive.

Sector Spotlight: Energy and Critical Minerals

The energy sector remains a cornerstone of the TSX’s outperformance. Crude oil prices averaging $75 per barrel in 2025 have bolstered Canadian energy giants like Suncor Energy and Cenovus [3], while the sector’s low breakeven costs and CUSMA trade protections provide a buffer against U.S. tariff threats [2]. Meanwhile, the mining sector is gaining traction, particularly in critical minerals such as lithium, nickel, and copper—key inputs for electric vehicles and battery technology. The gold sector, with a year-to-date return of nearly 50%, has also outperformed, driven by its role as an inflation hedge and geopolitical safe haven [3].

For investors seeking exposure, ETFs like the iShares S&P/TSX Energy Transition Materials Index ETF (XETM) and Sprott Energy Transition Materials ETF (SETM) offer diversified access to these high-growth areas. XETM, which tracks companies involved in energy transition materials, has shown strong alignment with global decarbonization trends, while SETM’s broader mandate includes rare earth elements and silver, both recently designated as critical minerals by the U.S. Geological Survey [4].

Valuation Metrics and Risk Considerations

Despite the TSX’s gains, valuations remain mixed. The energy sector trades at a price-to-earnings (P/E) ratio of 22.0x, above its three-year average, while the gold sector’s 14.3 P/E and 24.7% return on equity (ROE) suggest undervaluation relative to its performance [3]. However, challenges persist: base metals like copper face downward pressure from a strong U.S. dollar, and the agriculture sector lags due to global crop oversupply [3]. Investors must also weigh the risks of prolonged U.S.-Canada trade tensions, which could disrupt supply chains and dampen demand for Canadian exports [1].

Strategic Entry Points

The current environment presents a strategic window for investors to position in real asset stars. With the Bank of Canada expected to cut rates further in 2025, borrowing costs for capital-intensive sectors will decline, potentially boosting corporate profitability and equity valuations [2]. Additionally, the Fed’s easing cycle has historically supported commodity prices, with crude oil and copper demonstrating strong sensitivity to rate cuts [1]. For those seeking income and downside protection, covered call ETFs like the BMO US High Dividend Covered Call ETF (ZWH) and fixed-income plays such as the BMO Short Corporate Bond Index ETF (ZCS) offer complementary strategies in a low-rate environment [5].

In conclusion, the TSX’s real asset stars—particularly energy and critical minerals—are well-positioned to capitalize on the anticipated monetary easing. While risks like trade uncertainties and stretched valuations in some sectors persist, the combination of lower interest rates, global demand for clean energy materials, and a resilient Canadian dollar creates a compelling case for strategic entry. As the Bank of Canada navigates its path to a 2.25% policy rate, investors who align with these trends may find themselves at the forefront of the next phase of the TSX’s record run.

Source:
[1] Assessing the Timing and Implications of the Next Bank of Canada Rate Cut in a Volatile Economic Climate [https://www.ainvest.com/news/assessing-timing-implications-bank-canada-rate-cut-volatile-economic-climate-2508/]
[2] Bank of Canada expected to cut rates twice more in 2025, survey shows [https://www.mpamag.com/ca/mortgage-industry/market-updates/bank-of-canada-expected-to-cut-rates-twice-more-in-2025-survey-shows/545845]
[3] Commodity price influence on Canadian equities: A 2025 outlook [https://stockhouse.com/news/newswire/2025/05/07/commodity-price-influence-on-canadian-equities-a-2025-outlook]
[4] Silver & Copper Could Be Critical Minerals: 3 ETFs to Ponder [https://www.etftrends.com/gold-silver-investing-channel/silver-copper-critical-minerals-2-etfs-ponder/]
[5] ETFs 2025 outlook [https://bmogam.com/ca-en/insights/etfs-2025-outlook/]