2025 Year in Review—A Masterclass in Misleading Emotions
By James Parkyn - PWL Capital - Montreal
On behalf of the PWL team, I’d like to wish you a happy, healthy, and prosperous year in 2026.
Our first blog of the year is a good time to look back on what happened in the markets and economy in 2025. Last year was a masterclass in how emotions can mislead investors. It defied expectations at almost every turn.
Pundits kicked off 2025 with sombre warnings of stretched valuations, slowing growth and the possible collapse of the AI boom.
If I had told you at the start of 2025 that we’d see sweeping tariffs, a record‑long U.S. government shutdown, sticky inflation and a geopolitical rollercoaster, I think you too would have expected a rough year for stocks.
Third year of double-digit gains
Every month seemed to bring a new reason to worry. Last April saw one of the sharpest selloffs in years after the U.S. announced sweeping tariffs.
Yet, in the end, markets delivered a third straight year of stellar double‑digit gains for U.S. and Canadian stocks, as we discuss in our latest Capital Topics podcast.
Very few pundits saw such results coming—proof, once again, of our frequent advice to ignore market forecasts. (See, for example, our last blog titled “Our Best Advice of 2025.” The first tip was “Ignore the pundits.”)
The incredible results also add to the ample evidence for patiently sticking to your long-term investing plan. Trying to time the market by selling would have been a costly mistake.
Canada was the biggest surprise
Perhaps the biggest surprise was Canada. Despite the glum headlines and anxiety over U.S. tariffs, the S&P/TSX Composite Index quietly delivered one of the strongest performances in the world.
(You can find market statistics on our Capital Topics website in the resources section or on our team’s page on the PWL Capital website.)
Economically speaking, 2025 wasn’t a boom or bust. Inflation in Canada continued its downward drift, ending the year at 2.2%. This allowed the Bank of Canada to start cutting rates earlier and more aggressively than the U.S., with four rate cuts during the year from 3.25% to 2.25%.
Canadian bonds did their job
Stubborn inflation in the U.S. led the Federal Reserve Board to be more cautious, with only three rate cuts from 4.5% to 3.75%. Euro area inflation fell more sharply, leading to four cuts from 3.15% to 2.15%.
Unemployment edged higher in both Canada (ending at 6.8%) and the U.S. (finishing at 4.4%). U.S. GDP growth surprised with a final-quarter annualized rate of 4.3% versus Canada’s more modest 2.6% third-quarter increase.
Thanks to the Bank of Canada’s rate cuts and falling yields, the Canadian short‑term bond index finished the year up 3.9%. The broader universe bond index, which holds longer-dated bonds, returned 2.6%.
Bonds didn’t steal the spotlight, but they did their job of providing stability and income.
31.7% gain for S&P/TSX
The spotlight stealer was, without a doubt, the stock market. Equities powered through wild swings in investor sentiment and uncertainty to deliver another banner year.
It’s worth recalling that in late 2024, many investors wanted to go all‑in on the U.S. market. U.S. markets had dominated for a decade, handily outperforming Canadian equities by more than 6% annually for the last 10 years. Future prospects were gloomy because of the prospect of tariffs, job losses and a productivity crisis.
But Canada shocked everyone. As of December 31, the S&P/TSX Composite Index was up 31.7%—almost triple the return of the U.S. total market index in Canadian dollar terms. Small caps did even better—skyrocketing a whopping 50.3%—while large and mid-cap value stocks gained 35.8%.
Safe-haven investors powered Canadian gains
The gains reduced the gap between U.S. and Canadian equities from 6% annually to 1.5% over the last 10 years. This is especially impressive considering that U.S. returns included the booming Magnificent 7 stocks.
This reinforces our message of diversification and not trying to wait for “the right moment” to invest. Returns often come in short, unpredictable bursts. If you wait, you’re likely to miss out.
The Canadian gains were powered by financials, energy and basic materials—the last benefitting from the rush into gold by safe-haven seekers. Basic materials small caps spiked an incredible 137.6% in 2025.
Mag 7 mega-stocks soared 21.9%
U.S. equities lagged, but still turned in a decent performance, with an 11.9% gain for the U.S. total market index in Canadian dollars (17.2% in U.S. dollars, the difference being due to the greenback falling against the loonie). Unlike in Canada, small caps and value stocks trailed, up 7.7% and 10.7% respectively in Canadian dollars.
The AI boom didn’t end; if anything, it accelerated. Roughly 40% out of the 17.9% return of the S&P 500 Index came from tech stocks, while 18% was from communication services.
The Magnificent 7 tech mega-stocks, which represent about a third of the S&P 500, remained the gravitational centre of the market with an average performance of 21.9%. That said, the boost really came from only two of the Mag 7 stocks that beat the market— Alphabet (Google), which rose 65.2% in U.S. dollars, and NVIDIA (up 38.9%).
International stocks delivered another surprise. International large and mid-cap stocks shot up 25.3% in Canadian dollars, while small caps and value stocks surged 25.9% and 35.8% respectively.
Emerging large and mid-cap stocks rallied 28.3% in Canadian dollars.
Uncertainty is the cost of admission
Uncertainty was plentiful in 2025, but 2026 has started off no different. Geopolitical and tariff risks are still significant. In fact, there has never been a year when everything was calm and predictable. Markets have always lived with uncertainty. Sudden events push us to react emotionally, as we discussed in our recent blog on investors’ behavioural biases.
But uncertainty isn’t a bug; it’s the system—the price of admission for higher long-term returns.
Last year was a reminder that markets don’t move in straight lines or follow the headlines. Remaining invested, diversified and disciplined paid off again. Investors who tried to time the market missed the strongest parts of the rally.
Investors who stayed the course prospered.
Find more commentary on personal finance and investing, our podcast, past blog posts, eBooks, model portfolios and market statistics on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and our Capital Topics website.