Canadian stocks have spent much of 2026 doing something that looks increasingly counterintuitive: climbing while the country’s most important trading relationship becomes more hostile. The S&P/TSX Composite reached a record close of 36,957.63 on August 25, and even after a four-day September selloff it ended September 11 at 35,697.49, still roughly 12% higher for the year. Strong banks, miners, energy producers and a surprisingly resilient domestic economy have helped investors look through a growing list of tariffs and trade restrictions.
That resilience has limits. Economists warn that the market is dealing with targeted trade damage today, not the full consequences of losing the preferential framework that still protects much of Canada-U.S. commerce. If CUSMA were actually broken, the economic arithmetic could change quickly.
The TSX Has Reasons to Look Strong Despite the Trade Headlines
The most striking feature of the Canadian market is not that trade tensions have vanished from investor thinking. It is that investors have repeatedly found other reasons to buy. The TSX set a record closing high of 36,957.63 on August 25, after bank earnings and commodity-linked shares helped offset concern about a widening dispute with Washington. By August 31, financials represented 34% of the benchmark, while materials and energy together accounted for another 35.8%.
That composition matters. The TSX is far less dependent on mega-cap technology than the S&P 500 and far more exposed to banks, gold miners, pipelines and oil producers. Those companies can benefit from strong commodity prices, higher trading revenue or domestic earnings even while manufacturers face tariffs. The result is a market that can look healthy at the index level while severe pressure builds in narrower industries such as autos, metals, lumber and export-oriented manufacturing nationwide.
Canada’s Economy Gave Investors a Stronger Starting Point
Canada also entered the latest tariff escalation with better economic momentum than many investors expected. Real GDP rose 0.8% in the second quarter, equivalent to a 3.3% annualized pace, after barely growing in the first quarter. Exports, household spending and business capital investment all contributed, while 17 of 20 major industrial sectors expanded. That rebound gave markets evidence that the economy could absorb at least some trade friction without immediately sliding into recession.
The external accounts told a similar story. Canada posted an $8.8-billion current-account surplus in the second quarter, its first since 2022 and the largest since 2005. Goods exports jumped 13.1% to a record $232.1 billion, led by energy, while crude oil and bitumen exports reached $44.8 billion. Those numbers do not erase tariff risks, but they help explain why equity investors have been willing to price resilience rather than an imminent nationwide downturn in the near term.
Today’s Tariff War Is Painful but Still Uneven
The current trade war is serious, but it is still concentrated rather than universal. Washington imposed a 50% tariff on $27.6 billion of Canadian goods effective August 22, and Ottawa answered with targeted counter-tariffs on the same value of U.S. imports beginning September 8. Canada’s measures cover products including steel and aluminum, dairy, appliances, farm equipment, pulp and paper, plastics and electronics. The United States has also moved toward import bans on selected Canadian dairy, alcohol and motorcycles and restrictions on Canadian access to federal procurement.
That creates real pain without reproducing the effects of a border-wide tariff wall. A company selling a targeted product into the United States can face an abrupt loss of competitiveness, while a bank, gold miner or domestic utility may feel little direct impact. This unevenness helps explain the gap between grim trade headlines and a stock index that has remained comparatively resilient so far.
CUSMA Was Not Terminated on July 1
The most important fact about CUSMA is also the easiest to misunderstand: it did not expire on July 1. At the mandatory six-year review, the United States declined to extend the agreement for a fresh 16-year term. Canada and Mexico supported renewal, but without unanimous agreement the pact moved into annual reviews. CUSMA remains in force until 2036 unless the governments later extend it or one country invokes the withdrawal mechanism.
That distinction is crucial for markets. The agreement still provides a rules-based framework for an economic relationship measured in billions of dollars a day, and qualifying goods can continue receiving preferential treatment. The July outcome therefore created uncertainty rather than an immediate collapse in trade rules. Investors can live with uncertainty for long periods. What becomes harder to price is a formal withdrawal that removes tariff preferences, disrupts supply chains and forces companies to reconsider where production belongs.
Economists Have Modeled What a Real Break Could Look Like
Economists have tried to measure that darker scenario. Scotiabank modeled one case in which CUSMA fails and the United States places a 10% tariff on goods that are currently exempt under the agreement, while existing sectoral tariffs remain. In that scenario, Canadian real GDP is about 0.6% lower roughly one year after negotiations collapse, and unemployment peaks around 6.5%. That would be damaging, but still potentially manageable with monetary and fiscal support.
Its severe-fragmentation scenario is much harsher. If the United States applies a 35% tariff to applicable Canadian imports, with lower rates on energy and potash and existing sectoral tariffs maintained, Scotiabank estimates Canadian GDP would be 1.9% lower about a year later. Unemployment would peak near 7.1%, exports and investment would weaken, and the Bank of Canada would likely have to ease policy. That is the kind of shock equity markets have not yet been forced to absorb.
Ontario Shows How Trade Damage Spreads Beyond the Factory Floor
Ontario shows why a CUSMA rupture would not stay confined to exporters. The province’s 2026 budget included a slower-growth scenario that assumes the United States withdraws from CUSMA and imposes a 12% tariff on Canada and Mexico while retaining existing Section 232 measures. Ontario’s government used that scenario to illustrate how quickly weaker trade can spill into investment, employment and household demand in a manufacturing-heavy economy.
Even under the tariff regime already modeled before the latest escalation, Ontario’s Financial Accountability Office found manufacturing to be especially exposed. Its analysis projected manufacturing output could be 8% below a no-tariff path in 2026, with motor-vehicle-parts output down more than 22%. That matters because supply chains do not stop at factory gates. A weaker assembly plant means fewer orders for transport companies, tooling firms, professional services, restaurants and local retailers. Markets can ignore isolated pain more easily than a synchronized regional economic downturn.
Calm Markets Can Underprice Political Risk
One reason economists remain uneasy is that markets can underprice political risk until the moment it becomes operational. Desjardins warned earlier in 2026 that currency traders appeared unusually relaxed about the CUSMA review, with options markets showing little premium for a no-deal outcome. It also noted strong inflows into Canadian equities as global investors rotated away from crowded U.S. technology positions and toward under-owned Canadian companies.
That flow can become self-reinforcing. Rising bank and resource shares attract more capital, stronger index performance improves sentiment, and the absence of an immediate macroeconomic collapse makes the trade dispute look containable. But positioning is not the same thing as economic insulation. If investors suddenly conclude that preferential access to the U.S. market is at risk, repricing could extend beyond exporters to the Canadian dollar, corporate credit, bank loan losses and domestic cyclicals. Calm markets can therefore coexist with a large unresolved tail risk.
Canada Is Diversifying, but Replacing the U.S. Takes Time
Canada has made visible progress in reducing its dependence on the U.S., but the starting point remains highly concentrated. Statistics Canada reported that 71.7% of Canadian merchandise exports went to the United States in 2025, down from 75.9% in 2024. Exports to non-U.S. destinations climbed 17.2% that year, helping offset much of the decline in U.S.-bound shipments. In July 2026, exports to countries other than the United States reached another record high.
That diversification is economically valuable, especially for commodities that can be redirected through ports and global trading networks. It is much harder for deeply integrated manufacturing chains. Autos and parts can cross the Canada-U.S. border multiple times during production, and replacing nearby American customers with distant markets requires new logistics, certifications and supplier relationships. Diversification can reduce vulnerability over time, but economists generally treat it as a multi-year adjustment rather than an instant substitute for CUSMA market access.
Jobs Could Be the Bridge Between Trade Trouble and Stock Losses
The labour market offers another reason for caution. Canada lost 42,000 jobs in August, although the unemployment rate held at 6.4%. Statistics Canada said industries dependent on U.S. export demand continued to face an uncertain environment, and the average layoff rate over the previous year was higher in those industries than elsewhere. At the same time, manufacturing employment rose by 22,000 in August, showing how uneven the adjustment remains.
For investors, that mixed picture is important. A national unemployment rate in the mid-6% range does not yet signal a trade-driven crisis, especially after stronger job creation earlier in the summer. But a sustained deterioration in export-sensitive regions would change the earnings outlook for banks, retailers, railways and other companies that appear only indirectly exposed to tariffs. The transmission mechanism from trade policy to stocks often runs through jobs, credit quality and household spending rather than customs duties themselves over time.
The Market Can Absorb Tariffs More Easily Than a Broken Trade System
The market’s message is therefore narrower than the headline performance suggests. Stocks have shown they can withstand targeted tariffs, political hostility and trade barriers when banks are profitable, commodity prices are supportive and domestic demand remains functional. The TSX’s record high in August was evidence of resilience, not proof that investors are ignoring every risk.
The decisive question is whether the conflict remains a collection of expensive exceptions or becomes a break in the continental trading system itself. CUSMA still operates, annual reviews are now the default, and negotiations can still produce an extension. If that framework survives, companies may continue adapting around tariffs and finding new markets. If it does not, economists’ downside scenarios point to weaker GDP, higher unemployment and spillovers beyond the industries in the firing line. That is why the market can keep climbing today while the CUSMA question remains the risk capable of changing everything.
