International equities significantly outperformed U.S. equities in 2025, led by strong results in Brazil, China, Canada, Germany, and the UK. U.S. underperformance was driven by a weaker U.S. Dollar, differing central bank policies maintaining “higher for longer” rates, and a rotational shift away from the highly valued U.S. growth-oriented market.
International equities delivered performance alpha for Canadian investors.
Going into the end of 2025, eight of the ten largest economies (by GDP) remain in clear uptrends. This upward momentum is indicated by positive readings in their 8/40 Weekly exponential moving averages, with the longer moving average sloping upwards. The only exceptions are Germany and India, which are currently consolidating.
International equities, proxied by the MSCI ACWX (up 26.68% YTD), continue to show relative strength to the iShares Core S&P 500 (up 14.67%).
- This outperformance is led by the following country-specific ETFs —iShares MSCI Brazil (43.20%), iShares MSCI China (33.20%), iShares MSCI Canada (28.64%), iShares MSCI Germany (28.62%), and iShares MSCI United Kingdom (21.88%).
While the S&P/TSX Composite has historically lagged the S&P 500 since 2010, a recent shift driven by U.S. equities weakness and strength in precious metals has favored Canada. This structural change was technically confirmed in February 2025, when the 8/40 Weekly EMA on the relative strength ratio reached an inflection point and has since advanced to clear higher-highs.
On the homefront, Canada was a significant beneficiary of the gold bug.
After a brief consolidation period at the tail end of Q3, the S&P TSX Composite Index resolved its direction upwards, hitting an all-time high of $31,541 during the first week of December. The index continues to show relative strength to the S&P 500, driven by precious metals and resources, which have been a strong catalyst for the resource-heavy index throughout 2025.
Compared to its U.S. counterpart, market breadth is also both deeper and wider —80% of index constituents are currently trending above their 200-day simple moving averages, with most economic sectors displaying expansion.
- This strength is led by (with their YTD performance) —Materials (79.03%), Financials (26.53%), Consumer Discretionary (25.09%), Information Technologies (17.96%), and Consumer Staples (14.70%).
Compiled by the Organisation for Economic Co-operation and Development (OECD), the CLI is a composite of indicators covering financial, manufacturing, business confidence, housing and investment, and U.S. external demand —all of which consistently lead business cycle turning points.
Economic data provides mixed signals.
The market is not the economy, but rather a reflection of where investors believe the economy is heading. Clearly, the strong index performance (up 23.86% YTD) suggests investor optimism. And, key economic indicators appear to be providing a similar narrative:
- Continued strength in the Composite Leading Indicator: The CLI continues to rise, pointing toward sustained future economic activity. At 101.35, the CLI suggests growing economic activity ahead.
- Continued gross domestic product growth: Canada’s GDP grew by 0.64% in the third quarter.
- Mixed labor market signals: The unemployment rate surprisingly shrunk to 6.5% for the second consecutive month, seemingly suggesting a stronger labor market. However, a deeper look reveals that the data is skewed toward part-time work and youth hiring, masking underlying weakness in full-time employment and key economic sectors.
That said, similar to the U.S. (and most developed countries), Canada’s economy is predominantly driven by household consumption, which makes up nearly 55% of GDP. However, recent publications of key consumption data suggest caution ahead:
- The trend in the Consumer Confidence Index has been declining steadily since August 2021.
- Consumer Spending flattened in Q3, dropping by 0.11% from the previous quarter to $1.42 trillion —a sign of slowing consumer demand.
- In September, Retail Sales decreased by 0.70% to $69.8 billion, with sales down in six of the nine subsectors —driven by reduced discretionary consumer spending and flat core retail sales, suggesting weaker sales momentum heading into year-end.
The amber lights are blinking, now what?
The Richard Ivey School of Business PMI, a gauge of economic activity dropped to 48.4 (from 52.4 in October), indicating a contraction (below 50) in business activity across Canada’s public and private sectors. This is the first contraction reading since May and it fell sharply below market expectations of 53.6, suggesting a sharper-than-anticipated decline in momentum.
Adding to the caution, technical indicators are flagging potential weakness. While the S&P TSX Composite Index trend is clearly up, the change in price momentum (MACD) is slowing, and capital inflow (Money Flow Index) is diminishing. These divergences suggest that the recent higher-highs in price action might be unsupported and warrant close monitoring.
- Similar technical developments can be observed across the index’s current leading sectors —Materials, Consumer Discretionary, Financials, and Information Technologies.
Whether these yellow flags translate into a reversion to the mean must be confirmed by the market itself. The ultimate red flag would be price breaking below its long-term trend filter, leading to the 8/40 Weekly EMA turning negative. Could this development be pullback in a continued uptrend? Or potentially something deeper? The amber lights are indeed blinking, but the market needs to confirm what is around the corner.