Year-End Market Update & Outlook

2025 Summary Index Performance

Equity Market Summary

Equity markets delivered strong full-year returns in 2025, but the path was far from smooth. Markets experienced a sharp drawdown in the spring, driven largely by renewed tariff announcements and trade uncertainty, including questions around the legal durability of some proposed measures. Risk sentiment recovered as quickly as it fell, as markets became increasingly sensitive to even modest signals of declining interest rates, cooling inflation, and softer labour data. Against a backdrop of ongoing geopolitical conflicts, investors repeatedly looked through short-term shocks and refocused on policy direction and earnings momentum.

Canada led global markets, with the S&P/TSX Composite up 31.7%, driven primarily by a surge in gold and precious metals, strong performance from select large-cap names such as Shopify, and a powerful rally in financials, supported by elevated investment banking and capital markets activity. The S&P 500 rose 17.9% in U.S. dollars (12.4% in CAD), with returns dampened for Canadian investors by a broad-based decline in the U.S. dollar globally, rather than a sharp appreciation in the Canadian dollar. Outside the U.S., MSCI EAFE (+25.7%) and MSCI Emerging Markets (+28.0%) benefited from easing financial conditions, improved growth expectations, and currency tailwinds, lifting the MSCI World Index to a 15.9% gain.

A notable shift from 2024 was the changing role of the “Magnificent Seven.” While these stocks continued to deliver positive returns, their dominance diminished as performance broadened across regions and sectors. Unlike 2024—when a narrow group of U.S. mega-cap technology stocks drove the majority of market gains—2025 returns were less concentrated, with non-U.S. markets, commodities, financials, and select cyclicals playing a much larger role.

2025 in Review: Three Defining Themes

1. Rate cuts mattered — and worked: 2025 marked a clear shift from restrictive to easing monetary policy. Both the Bank of Canada and the U.S. Federal Reserve cut rates multiple times, improving financial conditions and supporting risk assets. As inflation moderated, markets responded positively, particularly in cyclical and value-oriented sectors that had lagged earlier in the cycle.

2. Leadership broadened — materially: Equity returns were no longer driven by a narrow group of U.S. mega-cap stocks. Canada was the standout, led by an exceptional surge in materials and strong gains in financials and consumer discretionary. International developed and emerging markets also outperformed U.S. equities in Canadian-dollar terms, reinforcing the benefits of diversification.

3. Currency was a real headwind for U.S. exposure: While U.S. equities delivered solid gains (+17.9% in USD), returns were meaningfully lower for Canadian investors (+12.4% in CAD), driven primarily by a broad-based depreciation of the U.S. dollar globally, rather than a material appreciation of the Canadian dollar. Currency was a key driver of relative performance in 2025 and a reminder that returns are shaped not only by market outcomes, but also by how those returns translate back into investor portfolios.

2026 Outlook: Three Things We’re Watching Closely

1. Valuations vs. earnings delivery: Valuations across most major equity indices are elevated, particularly in U.S. technology. With less room for multiple expansion, markets will be increasingly driven by earnings outcomes. Companies — and regions — that can deliver real growth should be rewarded; those that cannot may struggle.

2. AI as an earnings story, not just a theme: Artificial intelligence remains a powerful structural driver, but the focus is shifting from potential to execution. Continued investment, productivity gains, and monetization will determine whether AI-driven companies can justify current valuations. This will be a key differentiator across sectors and markets.

3. Volatility, currency, and opportunity: With rate cuts underway and valuations higher, periods of volatility are likely. CAD/USD movements will continue to influence returns for Canadian investors, and market pullbacks should be viewed as opportunities rather than risks to avoid. Portfolios are maintaining elevated levels of cash, providing flexibility to deploy capital selectively if more attractive entry points emerge.

Planning Ahead

As we move into 2026, we will be reviewing RRSP and TFSA contribution opportunities with clients. Maximizing TFSA (and in many cases RRSP) contributions remains one of the most effective ways to enhance long-term, after-tax returns. For 2025, the RRSP contribution limit is 18% of earned income up to $32,490 and the TFSA contribution limit is $7,000. We will be reaching out to discuss contribution strategies, timing, and how new capital can be deployed thoughtfully and tax-efficiently within portfolios.

In Granite news

As mentioned in our November letter, we are planning a team outreach event in February in support of Chez Doris. Granite Gives Back is a core part of our culture and values, and we are pleased to extend this opportunity to our clients. If you are interested in joining us or would like additional details, please contact us at info@granitemfo.com.

We are also pleased to share that Carly Choueke has joined Granite as a full-time member of the team. Carly began with us as a summer student in 2024 and has been a valued contributor ever since. We are excited to have her continue her career with Granite and look forward to her ongoing impact on the firm.