Canadian and Mexican stocks are beating the S&P 500. Why tariffs aren’t sinking them.

Mexican and Canadian stock markets are outperforming the U.S. this year.

The SPDR S&P 500 ETF Trust (ticker: SPY) is down 2% so far this year as of Tuesday, March 24. The iShares MSCI Canada ETF (EWC) has risen 3.4% and the The iShares MSCI Mexico ETF (EWW) has soared 11.8%.

Investors may be forgiven for wondering why. After all, President Donald Trump has imposed steep tariff increases (with the potential for more on the way) and the fallout is expected to damage the economies of Canada and Mexico as well as that of the U.S.

So why isn’t more of this risk showing up in markets now? One simple reason on full display this week is investor optimism the tariffs won’t actually go into effect or last long if they do. But there are more complex factors at work in Canada and Mexico that will dictate future returns. These dynamics are important for international investors to understand.

Mexico’s value play. Mexican equities are rebounding from a terrible 2024. The iShares MSCI Mexico ETF, a broad-based index fund, plunged about 30% last year. So 2025’s performance may be partly attributed to investors buying the dip.

“You cannot look at Mexican year-to-date equity performance in isolation—you have to look at what happened in 2024,” says Alejo Czerwonko, chief investment officer of emerging markets Americas, UBS Global Wealth Management. “In a way, you could argue that a lot of the angst and bad news were priced in before Trump came into office in January.”

Czerwonko says investors may also be assuming Trump’s tariffs won’t all go into effect as threatened, and that they may not be permanent. UBS’s baseline scenario is that the U.S., Canada, and Mexico will eventually agree on a level of tariffs that doesn’t cripple any of their economies.

Even with this year’s runup, Mexican equities are trading at a price to earnings multiple of about 10.5 times, well below their 10-year average of 14.5 times, Czerwonko says.

Canada’s gold rush. The difference in performance between the S&P 500 and Canada’s TSX, its main equity gauge, this year can be chalked up in part to the composition of the two indexes. The materials sector comprises 2% of the S&P, but more than 13% of the TSX, according to data from FactSet.

Gold prices have been climbing. And nine of the top ten performing names in the TSX this year are mining companies, says Jim Thorne, chief market strategist at Canadian wealth management firm Wellington-Altus. “There is a lot of gold in the TSX,” Thorne says.

Energy and financial stocks also comprise a larger part of the TSX than they do the S&P 500. Plus, tech stocks, which have borne the brunt of losses in the U.S., play a smaller role in Canada’s stock market. “We don’t have the Magnificent 7,” Thorne says, referring to Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.

This difference also helps explain why the TSX’s performance has lagged that of the S&P 500 in recent years. The former is up nearly 16% over the past three years while the S&P has risen 30%.

Marc-André Lewis, president and chief investment officer at CI Financial Global Asset Management in Toronto, says that on a 10-year time horizon Canadian equities could outperform U.S. equities thanks in part to the much higher valuations of U.S. stocks.

“The starting point is relevant,” he says. Plus, the Canadian dollar is also weaker than the U.S. dollar. “If you invest in a Canadian fund, you could in theory get the benefits of both a cheap currency and cheaper market,” he says.

U.S. vs. the world. Technology companies have made U.S. markets the envy of the world. The Vanguard Total Stock Market ETF (VTI), an index fund of U.S. stocks, has an average 10-year annual return of 12.3% compared with 5.1% for the Vanguard FTSE All-World ex-US ETF (VEU).

For some investors, American exceptionalism felt like an ironclad law of markets. That is until this year when U.S. stocks, especially high-fliers, stumbled badly. Of the Magnificent 7, only Meta’s stock is up this year (6.8%); Tesla shares have fallen 30%. VTI is down 2% while VEU is up 8.4%.

“The market is undergoing a shift in its assessment of relative valuations for U.S. versus non-U.S. equities,” says Kevin DiCiurcio, senior investment strategist at Vanguard. “The U.S. has long had higher valuations than other equity markets, and we’re seeing a pullback on those stretched valuations.”

Valuations are a reason that Vanguard projects long-term annual returns on U.S. equities in the range of 2.9% to 4.9% per year compared with 7.5% to 9.5% per year for non-U.S. developed markets equities.

Best moves now. U.S. investors interested in buying Canadian or Mexican equities may best off buying a cheap index fund such as the iShares MSCI Mexico ETF (EWW) and iShares MSCI Canada ETF (EWC). Both have an expense ratio of 0.50%.

Of course, uncertainty on trade policy is something of a wild card even though some strategists doubt broad-based tariffs between the U.S. and its North American neighbors will become a permanent feature.

Thorne of Wellington-Altus says Canadian investors would be wise to allocate to U.S. equities given the stronger growth profile of the U.S. “When we talk with our clients, we say the U.S. is the place to be,” he says.

However, if tariffs became permanent, that would upend assumptions and could tip the Mexican and Canadian economies into recession. It would represent a headwind to U.S. economic growth, as well. “If we are getting into some kind of de-globalization, it’s negative overall for growth,” says CI Financial’s Lewis. “The bigger risk, in my opinion, is some form of stagflation.”

Ultimately, diversifying broadly across geographies could prove a lot safer than trying to pick winners in these uncertain times. “The world is changing fast and in unpredictable ways,” Czerwonko says. “So there is no guarantee that the winner of the last 15 years will remain the indisputable No. 1.”