Market in Canada Experiences Modest Dip as Investors Process Earnings Reports and Bank of Canada Rate Determination
The Bank of Canada (BoC) is keeping a close watch on the impact of a weakening economy and higher costs related to tariffs and trade disruptions, as key factors influencing the Canadian economy and stock market remain uncertain.
Recent economic data show Canada’s GDP growth is sluggish, with contraction in goods-producing sectors such as mining, quarrying, and oil and gas, while manufacturing shows some growth. Service sectors are broadly flat, highlighting overall economic headwinds primarily due to US tariffs on Canadian imports imposed from March 2025. This trade disruption has led to declining exports and restrained business and household spending, dampening economic growth prospects.
In response, the BoC has kept its overnight policy rate steady at 2.75% as of its June and July 2025 meetings but is expected to reduce it to around 2.25% by year-end to support the economy. The BoC aims to bring rates to the lower end of the neutral range, balancing stimulus to economic activity without overheating. This monetary stance reflects caution in response to trade-related uncertainty and domestic economic slack, as the unemployment rate has risen modestly to about 6.9% in June 2025 with easing wage growth.
Meanwhile, the US Federal Reserve’s monetary policy announcements also impact the Canadian economy. Given Canada’s close ties to the US through trade and financial markets, Fed decisions on interest rates and policy tightening or easing influence Canadian bond yields, currency fluctuations, and investor sentiment, thereby affecting the Canadian stock market. For instance, if the Fed signals tightening, it may lead to capital outflows from Canada, currency depreciation, or higher borrowing costs, all of which weigh on market performance.
Amidst these economic challenges, Canadian stocks are exhibiting a mixed performance. For example, Intact Financial Corporation reported earnings per share of $5.23 for the second-quarter, an increase from $4.86 per share a year ago. However, the company's stock is down by about 4.4%. On the other hand, Precision Drilling's stock is up nearly 6%, while Dye & Durham is soaring 32%. Other notable gains include Precision Drilling, Parex Resources, Boardwalk Real Estate, Toromont Industries, Bombardier Inc., Linamar Corporation, Stantec, and AltaGas.
However, Capital Power Corporation, G Mining Ventures, TFI International, iA Financial Corporation, Bausch + Lomb Corporation, EQB, CGI Inc., International Petroleum Corporation, and Lundin Gold are down 2 to 5.4%. Precision Drilling's earnings per share for the latest quarter is $0.61, a decrease from $1.44 per share in the year-ago quarter.
The BoC recently decided to leave interest rates unchanged at 2.75%, attributing the decision to high uncertainty, a resilient economy, and ongoing pressures on underlying inflation. If a weakening economy puts further downward pressure on inflation and the upward price pressures from trade disruptions are contained, the BoC may consider reducing the policy interest rate.
In summary, the interplay among US trade policies (tariffs), Canadian domestic economic conditions (GDP trends, labor market), and monetary policy decisions by both the Bank of Canada and the US Federal Reserve are key drivers of the Canadian economy and stock market dynamics in 2025.
Investors in the Canadian business sector are closely monitoring the BoC's decisions, as the central bank aims to bring rates to the lower end of the neutral range to support the economy, potentially leading to opportunities for investing in specific stocks. However, the ongoing trade disruptions and uncertain domestic economic conditions pose risks for businesses and investors alike, as the BoC may consider reducing policy interest rates if a weakening economy puts further downward pressure on inflation.
