The TSX's Gold Rush: A Vulnerable Bet?

Strategic Insights -

The Toronto Stock Exchange is on track for its best showing in 15 years, fueled by a monster run in gold prices that has electrified the market and helped erase a huge discount on Canadian stocks. However, this reliance on gold has created a vulnerability that could impact the TSX if gold mania were to vanish. With 18 of the top 20 performers in the S&P/TSX Composite Index being gold miners, the Canadian stock market is heavily tilted to gold.

Key Takeaways:

  • The S&P/TSX Composite Index has been driven by gold stocks, with 18 of the top 20 performers being gold miners, resulting in an average return of 170%.
  • Gold stocks are expected to generate $11.6-billion in earnings growth over the next year, compared to $12.9-billion from the entire rest of the market.
  • The TSX's reliance on gold has created a vulnerability, as a free fall in the commodity could weigh heavily on the index.
  • The price-to-earnings ratio of the TSX, when factoring in profit estimates for the year ahead, sits at 16.5, indicating that valuations are not cheap.
  • The TSX is shifting its focus from AI to gold, mirroring the US stock market's shift from AI to gold.
  • Canadian earnings growth is coming from gold stocks, with 18 of the top 20 performers in the S&P/TSX Composite Index being gold miners.
  • The materials sector, dominated by gold names, has generated more than one-third of the index's 23-per-cent gain.

Statistics:

  • The TSX is on pace for its best showing in 15 years.
  • The S&P/TSX Composite Index has generated a 23-per-cent gain this year, with the materials sector accounting for over one-third of the gain.
  • Gold stocks have generated an average return of 170% this year.
  • The price-to-earnings ratio of the TSX is 16.5 when factoring in profit estimates for the year ahead.
  • Gold stocks are expected to generate $11.6-billion in earnings growth over the next year.
  • The entire rest of the market is expected to generate $12.9-billion in earnings growth over the next year.

Sources:

  • "Why the TSX's gold rush is a problem": Byline: TIM SHUFELT; Staff
  • Purpose Investments Inc.: "Gold stocks expected to generate $11.6-billion in earnings growth over the next year"
  • JP Morgan report: "80 per cent of earnings growth in the US market has come from AI stocks over the past three years"