The setup looks stretched. By the most watched market-size gauge, the United States equity market now sits far above its economy and even above the late-1990s crest, a level that historically preceded lean forward returns for global investors who were pulled along by Wall Street’s tide. Put plainly, the Buffett indicator—that is, total market value over GDP—is hovering a little above 200 percent (≈ 217 % as of mid-2025), versus roughly 150 percent at the 2000 peak, which leaves scant margin for disappointment if earnings or policy wobble.
In Canada, context matters. Our public market is smaller, more cyclically tilted, and funded by a disclosure regime that keeps issuers close to home through SEDAR+, so information is plentiful even if liquidity is thinner. Warren Buffett once called the ratio “probably the best single measure,” wrote Buffett as chairman in Fortune in 2001, which is a useful reminder that this simple denominator check flags regime shifts rather than short-term trading levels.² Watch the denominator. If nominal GDP slows while prices levitate, the signal brightens, and that is when correlations usually spike as foreign capital de-risks cross-border.
From a valuation angle, the warning lights are not isolated. As of early October, the Shiller CAPE for the S&P 500 sits above forty, the highest since 2000, which historically maps to below-average ten year real returns and higher drawdown odds when earnings roll over.³ Canada’s sector mix has been a cushion and a curse in such phases, because financials, materials, and energy dominate the S&P/TSX Composite and tend to lag in late-cycle slowdowns but lead in early-cycle real asset reflations. Our mix is real. Financials are roughly thirty two percent of XIC by weight, with materials near seventeen and energy around sixteen, which together approach two thirds of the benchmark’s value and concentrate factor risk.⁴
Where Canada could lean if the cycle turns
For investors here, what breaks the link. A classic Canadian offset is earnings leverage to commodities, where supply constraints and capital discipline can support cash flows even as multiples compress, particularly if the Canadian dollar softens against a defensive U.S. dollar. On the micro side, SEDAR+ filings let investors track capital allocation, covenant headroom, and hedging without delay, which can surface issuers with resilient free cash conversion while U.S. peers still chase growth narratives. Liquidity can still bite. Thinly traded names gap first, then recover slowly, which is why scenario analysis suggests a range rather than a price target when mapping outcomes across a valuation shock.
Participating carefully, Canadians can still benefit. If U.S. multiples compress from lofty levels yet nominal growth and AI-linked productivity hold, Canada’s cash-flow heavy sectors could see relative strength as capital rotates toward dividends, buybacks, and balance sheet clarity, a style regime that has historically favoured our market makeup. Timing is unknowable. But the mix of a record-high U.S. market-cap-to-GDP reading and a four-handle CAPE says positioning should assume fatter tails on both sides of the return distribution, especially for portfolios overweight U.S. mega caps that now anchor global indices.³ In Toronto, we call that planning for April snow squalls, just in case.
So what should Canada do now? Emphasize diligence over prediction, compare multiples to cash yields, and use our regulatory infrastructure to read issuers closely before any bought deal or cross-listing that might amplify risk in a drawdown. Not a recommendation, for information purposes only. Investors may want to watch, especially if liquidity improves, because the next surprise could be macro, micro, or simply sentiment, and the signal flashing today is about valuation gap risk rather than an imminent bell. The challenge is to keep a Canada-first lens while acknowledging that when the U.S. resets, we feel it, sometimes more than we expect, and occasionally right as the Gardiner lane closure adds thirty minutes to the drive.
