TSX Posts Biggest Monthly Gain Since November as Political Risk Potentially Peaks

Toronto, May 31, 2025 — Canada's benchmark stock index, the S&P/TSX Composite, posted its strongest monthly performance since November 2024, as easing political tensions and improving investor sentiment fueled a broad-based rally. The index surged more than 4.2% in May, driven by strong performances in energy, financials, and technology sectors, signaling a potential turning point after months of market uncertainty.

The sharp rebound is being widely interpreted as a market response to what may be a peak in domestic and global political risk factors, which had earlier clouded investor outlook. A combination of stabilizing global monetary policy, steady commodity prices, and renewed investor confidence helped lift the TSX out of a volatile start to the year.

TSX Records Major Rally: Sector Highlights

The S&P/TSX Composite Index closed at 21,760.42 at the end of May, up over 4.2% from its April close, marking its biggest monthly gain since the 5.1% rally in November 2024.

Here’s how key sectors performed:

• Energy: Up 6.5% amid rising crude oil prices and expectations of steady global demand.

• Financials: Gained 4.8% as major Canadian banks reported better-than-expected Q2 earnings.

• Technology: Rose 5.3%, fueled by gains in AI-related and cloud-based software firms.

• Materials: Up 3.1% on stable gold and base metal prices.

• Utilities and Real Estate: Posted modest gains of 2.2% and 1.9% respectively, amid declining bond yields.

What’s Behind the Rally? Political Risk Potentially Peaking

Much of the optimism stems from the growing belief that the worst of political risk — both domestically and globally — may have already played out.

🇨🇦 Domestic Developments

In Canada, recent signals from Ottawa indicate a possible easing in regulatory uncertainty, particularly around resource development and tax policy. The federal government’s decision to delay the implementation of controversial capital gains tax reforms has eased some investor concerns, especially in the real estate and small business sectors.

Prime Minister Justin Trudeau’s minority government also appears more stable than earlier in the year, with no immediate signs of a snap election. The increased political clarity has reassured institutional investors wary of sudden legislative swings.

 Global Context

On the international front:

• The U.S. Federal Reserve has signaled a pause in rate hikes, calming fears of aggressive monetary tightening.

• The U.S.-China trade dialogue has regained momentum, reducing the probability of tariff escalations.

• Geopolitical tensions in the Middle East and Eastern Europe, while ongoing, have shown signs of containment, reducing oil supply fears and market volatility.

The reduced perception of systemic political and economic risk has been key in drawing investors back into equities, especially undervalued Canadian stocks.

Investor Sentiment Turns Positive

According to the latest sentiment surveys from Canadian fund managers, May saw the highest level of institutional buying activity in over six months. Notably, mid-cap and small-cap stocks witnessed increased inflows as investors looked beyond blue-chip safe havens.

Retail investors, who had largely stayed on the sidelines since early 2024, also made a comeback, with higher-than-average trading volumes on platforms like Questrade and Wealthsimple Trade.

Analysts React: “The Worst May Be Behind Us”

Market analysts are cautiously optimistic:

“We’re witnessing a classic risk-on rally, catalyzed by both macro and political clarity. While risks remain, the TSX’s fundamentals are improving,”
says Lydia Chen, Chief Market Strategist at BMO Capital Markets.

“The relief from political tension, both domestic and global, is driving valuations higher. There’s a growing belief that we’ve hit peak pessimism,”
notes Trevor Maines, Equity Analyst at RBC Dominion Securities.

However, experts caution that sustainability will depend on economic data and corporate earnings resilience in the coming quarters.

What Could Come Next for the TSX?

As the TSX exits a volatile spring with solid gains, several factors will determine whether this momentum continues:

1. Interest Rate Path

The Bank of Canada is expected to maintain current rates through the summer. However, any surprise moves in either direction could jolt the market.

2. Q3 Earnings Season

A strong corporate earnings cycle in July could further validate May’s rally. Sectors like mining, energy, and financials will be closely watched.

3. Federal Fiscal Policy

The Fall Economic Statement will be a major catalyst. Investors will be watching for clarity on capital gains tax policy and government spending priorities.

4. Global Economic Indicators

Any signs of a global growth rebound, particularly in China and Europe, would provide tailwinds for Canadian exporters and commodity producers.

TSX vs Global Benchmarks: Canada Outperforms

While global markets also posted gains in May, the TSX notably outperformed many developed market indices:

The TSX's relative strength stems from its high weighting in energy and financials — two sectors that performed well amid stable commodity prices and easing policy fears.

Risks to Watch

Despite the current rally, market risks persist:

• Reacceleration in inflation, leading to renewed rate hike concerns.

• Unexpected political events, such as snap elections or leadership crises.

• Global supply chain disruptions, particularly in agriculture or tech.

• Corporate debt defaults, as borrowing costs remain elevated for smaller firms.

Investors are advised to stay diversified and avoid overexposure to high-beta sectors.

Takeaway: A Repricing of Risk and Opportunity

The TSX's best monthly performance since November isn’t just a bounce — it’s a repricing of risk and opportunity. With political uncertainty easing and macroeconomic indicators stabilizing, Canadian equities are regaining investor trust.

While caution is still warranted, May's rally could mark the beginning of a broader revaluation phase for Canadian markets — one that rewards earnings stability, political moderation, and global integration.

For now, the Toronto Stock Exchange has found its footing. The question is whether it can build on this momentum as 2025 unfolds.