Canada's main stock index climbed to its highest level since September 4 on Friday, as a surge in oil prices lifted energy shares and offset a slide in technology stocks tied to the latest wobble in the AI trade.
The S&P/TSX Composite Index rose 0.11% to 36,176.55, capping a week that saw the index gain 1.44%. The move highlights how Canada's market can diverge from the US when crude is the driving force, given the TSX's heavy weighting in energy producers.
Oil spikes on Middle East tensions
Brent crude, the international benchmark, briefly touched $110 a barrel on Friday—its first time at that level since May. The spike was fueled by worries that escalating tensions in the Middle East could tighten global supply. That gave Canadian oil and gas producers a direct tailwind, with energy stocks jumping 2.8% on the day.
For context, Canada is one of the world's largest oil exporters, and its energy sector is a major component of the TSX. When crude prices rise, the earnings outlook for producers improves, and investors often bid up their shares. That dynamic can make the Canadian market more sensitive to oil price swings than, say, the S&P 500, which is dominated by technology and other sectors.
AI slump hits tech, but TSX feels it less
At the same time, Canadian technology stocks slipped as part of a broader pullback in AI-related names. The so-called AI trade—which has driven a huge rally in companies tied to artificial intelligence—has shown signs of volatility recently, with investors rotating out of high-flying tech and into other sectors.
But the TSX's tech sector is relatively small compared to its US counterparts. That means a downturn in AI sentiment has less impact on the Canadian index than it does on, say, the Nasdaq. Instead, the TSX's fortunes are more closely tied to commodities, energy, and financials.
This divergence is a reminder that not all markets move in lockstep. While US investors have been focused on AI-driven gains and losses, Canadian investors are watching oil prices and the broader energy cycle.
Bank of Canada warns on inflation
Adding to the mix, Bank of Canada Governor Tiff Macklem warned that persistently high energy prices could keep interest rate hikes on the table. The central bank has been battling inflation, and higher oil costs feed directly into consumer prices, especially at the pump and for heating.
Macklem's comments suggest that the Bank of Canada may need to keep monetary policy tight if energy prices stay elevated. For investors, that means borrowing costs could remain higher for longer, which can weigh on economic growth and corporate profits.
The warning comes as central banks around the world grapple with the delicate balance between curbing inflation and avoiding a recession. Energy price shocks complicate that task, as they push inflation up while also draining consumer spending power.
What it means for investors
For everyday investors, the TSX's record high is a sign of how commodity strength can drive market performance. But it also underscores the importance of diversification. A portfolio heavily tilted toward energy may benefit when oil rises, but it could suffer if prices reverse.
The AI slump, meanwhile, is a reminder that even the hottest trends can cool. Investors who piled into tech stocks during the AI rally have seen volatility, and the recent insider sales and IPO scrutiny have added to the jitters. As we've noted, tech stocks have slipped on those concerns.
For those watching the energy sector, the key question is whether oil can hold above $100. If it does, energy stocks could continue to outperform. But if tensions ease or demand weakens, the rally could fade. The recent run above $100 has already boosted energy shares and lifted outlooks for producers like Exxon.
Investors should also keep an eye on the Bank of Canada's next moves. If rate hikes resume, that could pressure rate-sensitive sectors like real estate and utilities, even as energy stocks thrive.
Ultimately, the TSX's resilience shows that a diversified market can find support from multiple sources. But it also highlights the risks of betting too heavily on any single theme, whether it's AI or oil.
