Key Takeaways
- The TSX Composite is up roughly 9% YTD, driven largely by energy and financials sectors with reasonable valuations.
- Technology, utilities, and REITs on the TSX are trading at multiples that price in near-perfect execution over the next three years.
- History shows that the most dangerous moment to buy is when consensus becomes universally bullish as it is today.
- Selective exposure remains warranted; the broad market thesis is not broken, but margin of safety is thin in several sectors.
I want to be honest with you about something: I am genuinely worried about a subset of TSX investors right now. Not because Canadian markets are in a bubble I don’t believe they are. But because the enthusiasm that comes with a 9% year-to-date gain has a way of making people sloppy about where they are paying up.
Let me start with what’s working. Energy stocks are performing, and they deserve to be. The global crude market is tighter than the headlines suggest, Canadian producers have rebuilt balance sheets after years of pain, and the commodity cycle has genuine fundamental support. The same is broadly true for Canadian financials. The Big Six banks have navigated a rising-rate environment better than most analysts expected, and their capital ratios are strong. If you own a diversified basket of TSX energy and financial names, I have no particular concern. The valuations are not stretched, and the earnings support is real.
Where I’m Getting Nervous
The story is different in three sectors: technology, utilities, and REITs. Each for different reasons, but with a common thread the market has priced in outcomes that leave essentially no room for disappointment.
Canadian technology names have benefited from the AI enthusiasm sweeping global markets, and some of the multiple expansion has been justified by genuine earnings growth. But when I look at names trading at 35x to 50x forward earnings in a 4.5% interest rate environment, I start asking hard questions about what needs to go right for these prices to hold. The answer, in most cases, is: almost everything. That’s not a margin of safety that’s a prayer.
The Utility and REIT Problem
Utilities and REITs present a different kind of risk. These are sectors that institutional investors rushed into during the 2020–2022 rate-suppression era, pricing them as bond proxies when bonds were yielding nothing. The rate normalization cycle has brought some discipline back, but not enough. Many Canadian utility names still trade at premiums that assume interest rates will fall meaningfully and stay low an assumption I’m no longer willing to make after watching the Bank of Canada’s credibility struggle through the 2021–2022 inflation cycle.
The REIT story is even more acute. Office REITs have been punished, appropriately, but industrial and residential REITs still trade at valuations that assume a perfect soft landing for the Canadian economy: no recession, steady rent growth, falling rates, and no further increase in capitalization rates. That’s a lot of moving parts to get right simultaneously. Canadian residential real estate is still the most expensive in the G7 on a price-to-income basis, and I don’t think that resolves cleanly without some pain.
What Bull Markets Do to Judgment
I’ve been investing in and covering Canadian capital markets for fifteen years. I was here through 2008, through the oil crash of 2015, through 2020. And I can tell you with confidence that the most dangerous thing that happens in a bull market is not the eventual correction it’s the gradual abandonment of valuation discipline that happens in the months before it.
People stop asking “what is this worth?” and start asking “where is this going?” Those are different questions, and conflating them is how ordinary investors end up buying at peaks. I see that conflation happening in parts of the TSX right now. The narrative has shifted from “Can these companies deliver?” to “Why would you sell when the trend is up?” That’s a momentum argument, not an investment argument.
I am not saying sell everything and go to cash. That’s not how I invest and it’s not advice I’d give. The energy and financial exposures that have driven TSX outperformance this year remain defensible at current prices. The broad diversified TSX investor is probably fine. My concern is more surgical: the investor who has been rotating into technology and utilities chasing this year’s performance may be taking on more risk than they recognize.
What I’m Doing With This View
In my own thinking about portfolio construction, I’m treating this as a moment for discipline rather than action. I’m not selling quality holdings that have run. But I am being much more selective about adding new positions in the sectors I’ve described. When I look at a utility trading at 22x earnings with a 3.8% dividend yield in a world where 5-year Government of Canada bonds yield 3.9%, the math doesn’t compel me to act.
I’m also watching the sentiment data closely. When the Investors Intelligence bull/bear ratio for Canadian markets gets above 3:1, I start paying attention. We’re approaching those levels. That doesn’t mean a crash is imminent it means the conditions for a meaningful pullback are ripening, and the time to be thoughtful about risk is before that pullback happens, not after.
The Bottom Line
The TSX broad market is not in a bubble. But technology, utilities, and REITs are pricing in outcomes that require near-perfect execution, and I don’t think the risk/reward in those sectors justifies the valuations at current levels. The time to demand a margin of safety is when everyone around you has stopped caring about one.