Main Street vs Bay Street

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   By Guest Blogger Ryan Lewenza

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What if I told you that the largest economy in the world and our supposed closest ally would impose the steepest trade tariffs in a generation, that our economy would slow dramatically in part due to the new tariffs, but that our stock market would be up over 20%, posting one of the strongest gains seen in years. Well, that’s exactly what’s played out this year.

This year has been a tale of two streets: Main Street, where everyday Canadians are feeling the pinch, and Bay Street, where investors are riding a wave of optimism. Today, I want to explore the disconnect between our economy and the stock market, and why these two forces don’t always move in sync.

Canada’s unemployment rate surged from 5% in 2022 to 7%

Source: Bloomberg, Turner Investments

Over the long term, there’s a strong and consistent relationship between economic growth and the performance of the stock market. When an economy expands, corporate profits tend to rise, and those profits are the primary driver of long-term stock returns.

This connection is illustrated in the chart below, which overlays the S&P 500 index with its earnings. The correlation between the two is an impressive 0.96, underscoring a key principle: earnings drive stock prices over time.

S&P 500 and earnings relationship

Source: Bloomberg, Turner Investments

In the short term, it’s not uncommon to see the stock market rally even as the broader economy struggles. This apparent disconnect can be explained by a few key factors.

First, the stock market is inherently forward-looking. Investors aren’t reacting to last quarter’s results – they’re pricing in expectations for the future. If corporate earnings are projected to rebound or if economic conditions are expected to improve, stock prices can rise despite current weakness.

Second, stock prices are influenced by more than just economic growth. Variables such as interest rates, monetary policy, investor sentiment, government actions, and even technical market dynamics can all play a role. These forces can sometimes outweigh economic fundamentals, driving markets higher even when Main Street is under pressure.

Another reason the Canadian economy and stock market don’t always move in tandem is the unique composition of the Toronto Stock Exchange (TSX). Unlike the S&P 500, which is broadly diversified across sectors, the TSX is heavily concentrated in just a few.

Of the 11 sectors represented in the TSX, financials, materials, and energy dominate – accounting for approximately 32%, 17%, and 16% of the index, respectively. That means nearly 70% of our stock market is tied to just two major themes: resources and banks. So, when evaluating or forecasting TSX performance, these sectors deserve special attention.

As an example, this year the materials sector has surged, largely fueled by a 45% rise in gold prices. Gold isn’t driven by domestic economic conditions – it responds to global macro forces like interest rates, the strength of the U.S. dollar, and central bank buying activity. Similarly, the energy sector’s performance is shaped more by global supply-demand dynamics and geopolitical factors than by Canada’s internal economic health.

In short, the TSX can thrive even when our economy stumbles because its key drivers often lie beyond our borders.

TSX sector returns and weights

Source: Bloomberg, Turner Investments

Finally, valuations play a crucial role in shaping stock market performance. At the start of the year, Canadian equities were trading at just 17x earnings – a significant discount compared to U.S. markets, which were priced at 25x earnings.

This valuation gap made Canadian stocks relatively more attractive to investors. As a result, this pricing advantage has been a contributor to the TSX’s stronger performance this year.

P/Es for Canadian and US equity markets

Source: Bloomberg, Turner Investments

The TSX has been on a tear this year, breaking above the 30,000 mark for the first time in history. It’s a milestone few investors expected, especially given the economic headwinds and the ongoing trade tensions with the U.S. administration.

But as we’ve explored today, stock market performance is shaped by a complex mix of factors – many of which extend beyond the health of the domestic economy. From sector composition and global commodity prices to investor sentiment and valuations, the forces driving markets are multifaceted. That’s why it’s a mistake to draw a straight line between economic data and stock market performance.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/10/04/main-street-vs-bay-street/