The recent U.S. midterm election results are sparking optimism for Canadian stocks, with the S&P/TSX Composite index showing gains as Democrats take control of Congress. This shift is expected to lead to a more favorable U.S. trade stance towards Canada, potentially easing existing tariffs.
Investors are eyeing Canadian companies in sectors like automotive parts, consumer goods, steel, and software as potential beneficiaries of improved trade relations.
The outcome of the recent U.S. midterm elections is creating a wave of optimism for Canadian stocks, with the S&P/TSX Composite index already showing a notable uptick. The Canadian benchmark surged 2.3% the day after the elections and has continued to climb 1.6% since, outperforming the S&P 500 which has seen a slight decline of 0.5% in the same period.
This positive sentiment is largely driven by the Democratic party's gains, securing control of the U.S. Congress. This shift in power on Capitol Hill is fueling expectations of a more conciliatory U.S. trade policy towards Canada. Historically, trade relations have been strained, marked by U.S. tariffs on various Canadian imports and subsequent retaliatory measures from Canada. However, the current political climate suggests a potential easing of these trade tensions.
"There's optimism that something's going to change," remarked William Alan Reinsch, Scholl Chair in International Business at the Center for Strategic and International Studies. "That's based on the election returns, but also on statements by a number of Democrats ... that they intend to deal with Canadian tariffs."
Canada has long relied on the U.S. as its primary trading partner, with 76% of its $596.1 billion in exports heading south in 2024. Key exports include aluminum, automotive parts, crude petroleum, and paper products. The imposition of tariffs by the Trump administration, such as those on April 4, 2025, and further levies on dairy, alcoholic beverages, and vehicle parts in July, had a significant impact on Canadian markets.
"Investors have fears about global trade and global complexities, and that likely [has] led to some selling off of those stocks," said Chris White, head of research at 5i Research. While many Canadian stocks were negatively affected by U.S. tariffs, the Toronto Stock Exchange managed to outperform in 2025 due to its heavy weighting in energy and gold mining sectors, which benefited from geopolitical uncertainty.
Democrats Target Tariffs
The increased Democratic presence in Congress is expected to lead to efforts to dismantle or renegotiate the tariffs imposed by the Trump administration. "There's going to be a real big pushback from the Democrats [on tariffs]," stated Justus Parmar, founder and CEO of Fortuna Investments. "We're seeing some really big kinds of opportunities in Canada to start deploying money."
Democrats have introduced legislation aimed at revoking existing tariffs and limiting the president's ability to unilaterally impose new ones. For instance, the Banning Antiquated Duties and Delivering Equitable American Levies Act (BAD DEAL Act) proposed by Sens. Kirsten Gillibrand and Peter Welch, seeks to repeal tariffs levied under Section 338 of the Tariff Act and provide refunds for duties paid, including those against Canada.
While Democrats may not have a supermajority to completely override presidential trade powers, their influence is expected to push for changes. Scott Laing, finance professor at the University at Buffalo School of Management, noted, "The Democrats have the majority, but they don't have a supermajority. So, the tariffs are ultimately in the hands of the president." However, he added that the midterm election results, viewed as a referendum on his policies, might compel President Trump to reconsider his stance on tariffs, potentially to secure a reputational win with his base and lower consumer costs.
Investment Opportunities Emerge
Investors looking to capitalize on this shift can consider several Canadian stocks:
- Automotive Parts Manufacturers: Companies like Magna International and Linamar Corporation are poised for gains as tariff relief is anticipated, given the highly integrated nature of the Canadian and U.S. auto industries.
- Consumer Brands: Canada Goose and Molson Coors, which have faced headwinds from tariffs, could see significant upside if trade relations improve. Molson Coors has seen a substantial decline since the tariffs were announced, while Canada Goose has remained relatively flat.
- Steel Producers: Algoma Steel Group, a key player in steel sheet and plate production, could benefit from improved U.S.-Canada trade. The company's share of U.S. sales had previously declined significantly due to tariffs.
- Software Companies: Canada-based software firms, such as Descartes Systems Group, may experience a boost. More predictable geopolitical conditions are expected to encourage broader investment, potentially drawing capital back from more conservative investments like large Canadian banks. Descartes' stock, currently down nearly 9%, could present a compelling entry point.
The evolving trade landscape following the U.S. midterms presents a promising outlook for Canadian equities, with specific sectors and companies well-positioned to benefit from potential policy shifts.
