TSX Closer: The Index Closes Higher; National Bank Says Canada Can Ease U.S Tariff Bite by Lowering Internal Trade Barriers

The Toronto Stock Exchange closed with a gain on Tuesday, recovering a small portion of its losses in the previous two sessions, even as worries over Donald Trump's threat to impose 25% tariffs on Canadian imports amid political uncertainty continue.

The S&P/TSX Composite Index closed up 52.26 points to 24,588.58, after dropping a total 537 points in the two prior sessions. Among sectors, Telecoms, down 2.26%, and Battery Metals, down 1.56%, were the biggest decliners, with Financials, up 0.33%, the biggest gainer on the day.

National Bank on Tuesday noted while Canadians grow increasingly concerned about the prospect of a tariff war with the U.S., "progress in liberalizing internal trade within Canada has been slow". In many cases, the bank said, international trade agreements have given foreign companies better access to Canadian markets than Canadian businesses themselves. Unsurprisingly, it added, interprovincial trade has declined relative to international trade, from 50% to 40%.

National Bank noted a 2019 study from the International Monetary Fund (IMF) estimated the average tariff equivalent of non-geographic internal trade barriers in Canada at 21%. The bank cited a chart that shows this is significantly higher than the 3% that these same barriers impose on the U.S., and said: "According to the IMF, removing these barriers could boost interprovincial trade volumes to levels comparable with international trade. Such reforms could also make Canada more attractive to investors by providing easier access to the entire domestic market. One potential approach to accelerating progress is a 'coalition of the willing' among provinces. This is especially critical given the ongoing decline in Canada's manufacturing sector."

Daniel Schwanen, senior vice president at the C.D. Howe Institute, is cited by National Bank as saying the removal of internal trade barriers could raise Canada's standard of living and increase GDP per capita by an estimated 3.8% across the country. "It's time to stop scoring own goals and start unlocking our full economic potential."

Meanwhile, on the TSX, Bhawana Chhabra at Rosenberg Research today published an earnings preview that highlights 'An Improving Risk-Reward Profile'. Expectations of improving fundamental underpinnings coupled with attractive valuations in the Canadian equity market point to an interesting year ahead.

In her preview piece, Chhabra said notwithstanding what has obviously been a challenging year for global equities, the Canadian stock market backdrop has "improved in a notable way." Attractive valuations and an improving earnings landscape have provided a big assist, she added. And with the latest earnings season set to begin she broke down market expectations for 2024 Q4 and laid out what 2025 has in store — providing a hint: "fundamental support continues to build."

According to Chhabra, TSX earnings per share (EPS) are expected to grow by 5.7% annualized in the fourth quarter, with the growth trajectory expected to continue improving in 2025 to 11.1%. She said this recovery comes after a rough 2023, accelerating throughout 2024 as sector participation broadens. Even as four sectors, Energy, Financials, Health Care, and Real Estate, are expected to see earnings decline in Q4, profits across all 11 sectors are expected to expand next year, she added.

Chhabra writes: "Another important consideration is how well-balanced the environment is. This is not the same situation as we have in the United States, where the market is being driven by a handful of names. Rather, a large number of stocks are participating. The support is broad, not concentrated, with the leaders being Materials, Energy, Financials, and Industrials, which account for 74% of the TSX index and are expected to drive 84% of incremental net income growth.

She added: "Another contrast worth noting is the broader upgrade of momentum in Canada, where six out of eleven sectors have seen their Q4 projections revised higher compared to just three south of the border."

When it comes to revisions, Chhabra cited Materials, Technology, Consumer Staples, and Health Care as the leaders within the TSX. She said Financials have seen their earnings revision ratios stabilize. By way of comparison, Energy, Utilities, and Communication Services are the laggards, she added.

Moving to the drivers of earnings growth, the research first looked at Materials (11% weight). Chhabra said given gold miners are the largest component, this sector is a big beneficiary of the recent strength in precious metal prices, noting tailwinds for the miners "remain alive and well".

The Financials sector is another standout, Chhabra said, adding it is expected to account for 23% of the incremental profit growth this year. She wrote: "Continued rate cut expectations from the BoC (which is expected to help via an easing in credit risk, along with trading profits) and signs of stability returning to the housing market are key underpinnings. Not to mention that it is a sector that will not be directly affected by any Trump tariffs (not so good for the Industrials)."

Technology, Chhabra said, is "another sector punching above its weight," with 23% of incremental profits contribution, which, she added, is "striking" in view of its 9% market cap share. She wrote: "Strong earnings momentum and global tailwinds from the cloud transition and generative AI are positives for the Canadian Tech sector (valuations are not as stretched compared to their U.S. counterparts either)."

In sum, Chhabra said, the Canadian earnings season is expected to show "improvements in the fundamental underpinnings." She cited lower interest rates, a steeper yield curve, firming energy markets, and a super-competitive currency are all catalysts and antidotes to any Trump tariffs. From a sector perspective, she added, Materials, Technology, Financials, and Health Care have the greatest risk-reward potential, but the overall market is also supported by "alluring valuations", with the 3% equity risk premium far more attractive than the 0% ERP stateside.

West Texas Intermediate (WTI) crude oil fell off a five-month high on Tuesday that followed tightened U.S. sanctions on Russian oil exports as attention turns to the impact of President-elect Trump's promised tariffs on U.S. imports. WTI crude oil for February delivery closed down US$1.32 to settle at US$77.50 per barrel, while March Brent crude was last seen down US$0.80 to US$80.21.

Gold edged higher on Tuesday as the dollar fell after a U.S. inflation measure rose less than expected last month, while a report said the Trump Administration plans to gradually introduce tariffs on U.S. imports. Gold for February delivery was last seen up US$10.00 to US$2,688.60 per ounce.