Canada's energy-heavy index climbed more than 40% since January
Canada's stock index posted its second consecutive loss Wednesday, but the near-term pullback is doing little to dim the longer-term outlook.
That outlook is shaped by the energy sector's dominance on the TSX and surging global demand for power to run AI infrastructure.
The S&P/TSX composite fell 241.82 points, or 0.7 percent, to 34,412.05, according to Reuters, extending losses after touching a record closing high Monday.
Energy dropped 2.4 percent and materials fell 2.2 percent after oil settled 5.55 percent lower at US$88.68 a barrel, following US president Donald Trump's dismissal of a reported Iran ceasefire framework.
Gold slipped 1.2 percent on tighter monetary policy expectations.
A Reuters poll of 25 equity strategists and portfolio managers conducted May 19 to 26 projects the TSX will rise 1.9 percent to 35,300 by end-2026.
The index is expected to reach 38,000, a 9.7 percent gain, by end-2027.
Christine Tan, a portfolio manager at SLGI Asset Management, said strong energy and commodity prices are the main tailwinds, while below-potential growth and elevated unemployment tied to US trade and tariff concerns remain the key headwinds.
Energy accounts for 19 percent of the TSX's weighting and has climbed more than 40 percent since the start of the year, driven by the Iran-linked crude price surge, Reuters reported.
That exposure may now carry an additional tailwind.
The next phase of AI "may be won by whoever can solve the power, cooling and infrastructure challenges," AIP Asset Management senior portfolio manager Jay Bala told Reuters, adding that the TSX's heavy energy exposure positions it to benefit indirectly from the rally.
US power consumption has surged to record highs, driven largely by data centres dedicated to AI and cryptocurrency.
Still, the near-term picture remains cautious.
According to Reuters, twelve of 17 polled analysts said a correction was likely or very likely over the next three months.
"Valuations have run ahead of fundamentals," said Ben Jang, a portfolio manager at Nicola Wealth.
Canada's unemployment rate also rose to a six-month high of 6.9 percent in April, and the United States-Mexico-Canada Agreement faces a review deadline of July 1, Reuters noted.
Wednesday's losses were compounded by bank earnings that, while strong, appeared to have already been priced in.
BMO Financial, Bank of Nova Scotia and National Bank of Canada all beat quarterly profit estimates, strengthened by domestic business and capital markets income.
BMO and Scotiabank shares rose 0.8 percent and 0.5 percent respectively, while National Bank fell 4 percent.
Allan Small, senior investment advisor at the Allan Small Financial Group with iA Private Wealth, told Reuters there may be a "sell the news" phenomenon with the banks, noting that while earnings are strong, stock prices have already "gone way up in advance."
The broader macro backdrop reinforced the caution.
MSCI's global momentum gauge has outpaced the MSCI All Country World Index by 17 percentage points since end-March, on track for its strongest two-month outperformance on record in Bloomberg data going back to 1991.
Some warn the crowding carries risk.
"We are seeing bubbles forming in a number of areas, and the AI-led basket clearly has ignored all macro development," Ten Cap Investment co-founder Jun Bei Liu told Bloomberg.
Lotus Asset Management chief investment officer Hao Hong warned that if inflation expectations keep rising, the Fed may be forced into a bigger move that "will stall the momentum trade."
The AI concentration risk is most acute in Asia, where Taiwan has overtaken Canada to become the world's sixth-largest stock market and South Korea has leapfrogged the UK into eighth place, per HSBC data cited by CNBC.
TSMC now accounts for more than 40 percent of Taiwan's market capitalisation, while Samsung Electronics and SK Hynix together make up a record 42.2 percent of South Korea's Kospi.
HSBC's Asia-Pacific head of equity strategy Herald van der Linde told CNBC that many Asian portfolios are facing concentration risk at current levels, which "may limit further upside."
