AI Ambitions and Trade Frictions: What's Next for Canadian Stocks

The Canadian stock market presents a distinctive profile compared to its US counterpart, characterized by heavy weighting in energy (approximately 30%) and materials (approximately 20%) sectors, contrasting sharply with the S&P 500’s technology dominance [1]. This structural composition has created a unique situation where Canadian equities have been relatively insulated from the AI-driven tech rally that has defined US market performance. The TSX Composite Index has been testing record closes while navigating significant geopolitical headwinds, creating a complex investment environment [2].

The timing of this analysis coincides with the approaching July 1, 2026 USMCA joint review, which will determine whether the agreement is extended for 16 years or terminates in 2036 as required by its terms [3][4]. This renegotiation represents what analysts describe as a “defining event” for Canadian capital markets, with significant implications for corporate profits and investor confidence. President Donald Trump’s administration has privately considered withdrawing from the North American trade pact, injecting further uncertainty into pivotal renegotiations [10].

While Canada’s direct AI technology sector remains smaller than its US equivalent, the country hosts a significant AI ecosystem comprising 926 artificial intelligence companies, including 253 funded companies that have collectively raised $9.04 billion in venture capital and private equity, with 7 companies achieving unicorn status [7]. Cohere stands as the top AI company in Canada, representing the country’s leading indigenous AI capability.

However, the more immediate opportunity lies in infrastructure and industrial companies serving AI data center expansion. Celestica Inc. exemplifies this dynamic, with the company’s stock more than tripling over the past 12 months due to acceleration in revenue and profit margins. The company’s hyperscaler portfolio business generated US$1.4 billion in revenue, soaring 79% as multiple data center giants ramped production of advanced networking gear [8]. Celestica plans to invest approximately US$1 billion in capital expenditures in 2026 to expand its manufacturing footprint [9].

The energy sector’s role is undergoing transformation from a traditional commodity play to an AI infrastructure enabler. TC Energy reported record power demand from data centers, coal-to-gas conversions, and LNG exports driving all-time delivery records in fourth quarter 2025 and early 2026 [12]. This dynamic positions Canadian pipeline and natural gas companies as direct beneficiaries of electrification and AI-driven power demand. Data centers are projected to soon consume electricity equivalent to entire nations, with global electricity demand exploding accelerated by artificial intelligence, cloud computing, electrified transport, and data center expansion [5][6].

The nuclear energy segment, particularly companies like Cameco, benefits from AI data centers’ need for reliable, baseload power. This creates a unique positioning for Canadian energy companies at the intersection of traditional resource extraction and modern digital infrastructure.

A notable shift in capital flows has emerged as investors reconsider US tech exposure amid AI-driven valuation concerns. The TSX has benefited from capital rotation away from US technology stocks, with investors seeking exposure to sectors less affected by AI disruption [1]. This rotation has contributed to the TSX’s expected outperformance relative to the S&P 500 through 2026.

The valuation differential between Canadian and US markets presents a compelling relative-value opportunity. Canadian stocks are trading at a valuation discount to the US market, with the estimated Price-to-Earnings ratio for the Canada Stock Market at 20.18 as of February 2026 [11]. If the TSX continues to outperform, this gap may compress, providing upside for investors who maintain Canadian equity exposure.

The USMCA renegotiation represents the most significant near-term risk to Canadian equities. Trump’s administration has threatened to hike tariffs on Canadian goods to 100% if the country brokers a trade deal with China, and has raised levies on aircraft from Canada to 50% if it does not approve certain Gulfstream jets [10]. The cancellation of tariff negotiations in October 2025 due to an Ontario advertisement featuring former President Ronald Reagan illustrates the sensitivity of the negotiation process [15].

The Canadian market’s sector composition has emerged as a counterintuitive strength in the AI era. While technology stocks have dominated US market gains, the TSX’s heavy exposure to energy and materials has provided insulation against AI-related valuation pressures affecting high-growth tech companies [1]. This structural characteristic positions Canadian equities differently as investors reassess the implications of artificial intelligence on various sectors.

1. AI Infrastructure Demand
   : Continued expansion of AI data centers drives electricity demand benefiting Canadian natural gas and nuclear energy producers. This structural trend supports energy sector earnings growth independent of traditional commodity price movements.

2. Valuation Compression
   : The current discount to US markets may compress if the TSX continues outperforming, providing additional returns for Canadian equity holders.

3. Capital Flow Diversification
   : Ongoing rotation away from US technology stocks amid valuation concerns could continue benefiting Canadian equities.

4. Sector Allocation Advantage
   : Energy and materials exposure provides AI infrastructure leverage while maintaining defensive characteristics.

1. USMCA Renegotiation Uncertainty
   : The July 1, 2026 deadline represents the most significant near-term catalyst. A favorable outcome could support Canadian capital investment, while unfavorable terms could reduce corporate profits and investor confidence.

2. Trade Policy Escalation
   : Trump’s tariff threats and potential for 100% tariffs represent significant downside risk that could impact Canadian exporters across multiple sectors [14].

3. Dependency on Energy Sector
   : While currently advantageous, heavy energy sector weighting creates concentration risk if commodity markets underperform.

The Canadian stock market enters 2026 with a distinctive positioning relative to its US counterpart. The TSX’s sector composition—dominated by energy and materials rather than technology—has provided insulation from AI-driven valuation pressures affecting US tech stocks. This structural characteristic, combined with a valuation discount to US markets, creates a potential relative-value opportunity for investors [1][11].

The primary risk factor remains the USMCA renegotiation and associated trade policy uncertainty. The July 1, 2026 deadline provides a defined timeline for resolution, with significant implications for Canadian corporate profitability and capital investment. A pragmatic trade agreement would reinforce the TSX’s strength, while unfavorable terms could materially impact Canadian exporters.

The energy sector emerges as a key beneficiary of AI infrastructure expansion, with Canadian natural gas and nuclear assets positioned to meet growing data center electricity demand. This dynamic transforms traditional energy companies into AI infrastructure plays, potentially supporting earnings growth independent of commodity price movements [5][6][12].

TD Asset Management projects the TSX to continue outperforming the S&P 500 through 2026, driven by sector weighting advantages and ongoing capital rotation away from US technology [1]. This outlook depends critically on the resolution of USMCA negotiations and the avoidance of significant tariff escalation.

The Bank of Canada’s leadership has urged small and medium firms to invest in artificial intelligence, warning of future inflation risks if investment in AI is concentrated among the country’s largest corporations [13]. This policy stance reflects broader concerns about ensuring broad-based productivity gains from AI adoption across the Canadian economy.