Jefferies Financial Group analyst John Aiken warns that keeping tariffs in place for too long could seriously harm Canada’s economy. (REUTERS/Chris Helgren)
The Toronto Stock Exchange (TSX) could face a steep decline if the Canada-U.S. trade war escalates, warns Jefferies Financial Group analyst John Aiken. He predicts an initial 10% drop in the S&P/TSX Composite Index, with a potential plunge of over 20% once the full impact of tariffs becomes clear.
Aiken's report, released Sunday, highlights how the market has not fully accounted for the tariffs imposed by U.S. President Donald Trump. While the Canadian dollar has weakened, the TSX has remained relatively stable, suggesting a looming correction.
"With the Canadian dollar falling and the TSX yet to react, we could see an immediate 10% drop as the index adjusts," Aiken noted. He also cautioned that the longer tariffs remain, the more severe the economic damage will be.
Banking Sector at Risk
Financial institutions, especially banks, are expected to take the hardest hit. Given their strong connection to the economy, any slowdown could significantly impact their performance. In contrast, life insurance companies may be more resilient due to their international exposure, while property and casualty insurers might experience a milder impact.
Investment firms may also struggle with lower inflows and declining domestic stock values. However, holding U.S. equities could help offset some of these losses due to favourable currency conversions.
CIBC’s Perspective: A Smaller but Still Painful Drop
CIBC analyst Ian de Verteuil shares a similar outlook, though he predicts a smaller market correction. He estimates a 5% drop in Canadian stocks within the next week if the tariffs stay in place. However, he believes the global nature of many TSX-listed companies might cushion the blow.
"Equity investors haven't fully priced in the risks of these tariffs," de Verteuil stated. "If the tariffs last, we expect a short-term 5% decline, softened by the weaker Canadian dollar."
Some analysts suggest negotiations may limit the tariffs' impact, but de Verteuil is skeptical. He points out that the Trump administration has shown little interest in accepting Canada’s concessions.
Could Canada Enter a Recession?
Aiken warns that prolonged tariffs and potential countermeasures could push Canada into a recession by year-end. The uncertainty surrounding U.S. trade policy raises concerns that the conflict may not be short-lived.
"If Canada responds with dollar-for-dollar tariffs, the economic consequences will be far more severe for us than for the U.S.," Aiken explained.
With no clear resolution in sight, markets remain on edge, bracing for potential turbulence in the months ahead.
