What cured the TSX Equity index after COVID-19?


In September 2020, we found that stock prices for firms listed on the S&P/TSX Composite index (TSX) aligned well, on average, with earnings forecasts observed at that time. Using up-to-date data, we show that the rise in market valuations since September can be attributed to improved earnings forecasts.

A cure for the stock market

Like other stock markets around the globe, the TSX showed a V-shaped recovery after the COVID‑19 financial crisis. Using data up to September 2020, Fontaine, Ouellet Leblanc and Shotlander (2020; FOLS) find that the market valuations of firms listed on the TSX lined up with stock market analysts’ earnings forecasts, on average, despite the abrupt economic slowdown and uncertainty around the recovery. Of course, the average hides significant differences between the paths to recovery across firms.

During the later months of 2020, the virus continued to spread around the world, but stock markets kept their momentum. In Canada, the TSX rose by 10.1 percent between September 2020 and February 2021—an increase of around $300 billion in the value of the stocks, including reinvested dividends. This increase also corresponds to about 14 percent of the annual Canadian domestic output in 2019.

Does this mean the equity market has disconnected from the real economy? To find out, we repeat the analysis by FOLS (2020) using updated data. We notice that the increase since September can essentially be attributed to improved earnings forecasts. In November:

  • the largest gains occurred on the TSX
  • the number of revisions to firms’ earnings forecasts spiked
  • the percentage of positive earnings’ revisions peaked

We offer one interpretation for these findings. News about the regulatory approval and eventual distribution of COVID‑19 vaccines proliferated in November. This news—combined with the prospect of additional fiscal stimulus in the United States—bolstered the earnings forecasts of US and Canadian firms.

Overall, we conclude that the equity prices and earnings forecasts remain in line with each other, on average. This suggests that the TSX index is also well aligned with the economic conditions that stock market analysts anticipate.

Of course, the future may prove the analysts wrong.

The TSX ends 2020 with gains

We extend the analysis of FOLS beyond September 2020. Following FOLS (2020) and Landier and Thesmar (2020), we separate the cumulative returns in the TSX index into three components that include changes in:

  • the rates at which investors discount safe cash flows back to the present
  • the equity-risk premiums used to discount risky earnings back to the present
  • the analysts’ forecasts of future earnings

This decomposition allows us to measure how the revisions to earnings forecasts affect the TSX. To obtain this measure, we compare actual TSX values with values we obtain based on the same analysis but keeping the earnings forecasts unchanged.

Chart 1 shows the cumulative returns of the TSX index from September 2020 to mid-March 2021. During this period, the market value of stocks listed on the TSX rose by about 15 percent, on average. Most of this increase occurred in November, after the US election, coinciding with news releases that:

  • announced COVID‑19 vaccines would be distributed earlier than expected
  • suggested additional fiscal stimulus in the United States

Chart 1: TSX appreciation since September is largely due to positive earnings revisions

Sources: Bloomberg, Refinitiv and Bank of Canada calculationsLast observation: March 12, 2021

First, we find that the surge of the TSX since September 2020 can be almost fully attributed to the revisions in the forecasts of future earnings. The forecast revisions alone account for 89 percent of the rise in the value of the TSX during our sample period. The Bank of Canada (2021) also revised its outlook, citing, among other factors, the earlier-than-anticipated vaccine rollout, which shortened its assumptions about the time frame for achieving herd immunity.

After two months with relatively few forecast revisions, the total number of revisions across firms listed on the TSX peaked at 1,150 in November. Chart 2 shows the difference between the number of positive and negative revisions as a percentage of all revisions in each month. Overall, the number of revisions and their average direction drove the TSX growth shown in Chart 1.

Chart 2: Positive revisions to earnings forecasts peaked in November

Note: Using forecasts for one year ahead, we calculate the earnings revision ratio as follows: the number of positive revisions minus the number of negative revisions divided by the total number of revisions.
Sources: Refinitiv and Bank of Canada calculationsLast observation: March 1, 2021

Balancing out

Chart 1 shows that the impacts of the discount rate and the risk premium largely offset each other (the risk-premium effect is slightly larger). In other words, the yield offered by a safe Government of Canada bond with 10 years to maturity increased from around 0.6 percent early in September 2020 to roughly 1.6 percent in mid-March 2021. Rising interest rates pulled valuations down. In contrast, the equity risk premium from the model declined over the same period, pushing equity valuations up.

This offset is not surprising or uncommon. When investors offer to pay more for safety and liquidity, the term premium embedded in long-term government yields often flattens. This typically occurs when the equity risk premium increases.

But when this flight to safety reverses:

  • long-term yields rise
  • equity-risk premiums decline

Indeed, estimates based on the shadow rate model in Le et al. (2015) show that the term premiums on long-term yields rose throughout the second half of 2020. The offset arises as a result of improving news about both the economy and Canadian firms’ earnings forecasts.

Looking forward

We find that the rise in the value of the TSX Equity index between September 2020 and March 2021 aligns well with earnings forecasts by stock market analysts. This does not mean that the analysts’ forecasts and the current market value are the best predictions of what will come. Nor does it mean that these forecasts will be right. More research is needed to determine how closely analysts’ forecasts of firms’ earnings relate to projections for the Canadian economy.


  1. Bank of Canada. 2021. Monetary Policy Report (January).
  2. Fontaine, J.-S., G. Ouellet-Leblanc and R. Shotlander (FOLS). 2020. “Canadian stock market since the COVID‑19: Why a V-shaped price recovery?” Bank of Canada Staff Analytical Note No. 2020-22.
  3. Landier, A. and D. Thesmar. 2020. “Earnings Expectations in the COVID Crisis.” HEC Paris Research Paper No. FIN-2020-1377.
  4. Le, A., B. Feunou, C. Lundblad and J.-S. Fontaine. 2015. “Tractable Term-Structure Models and the Zero Lower Bound.” Bank of Canada Staff Working Paper No. 2015-46.


We thank Tiago Figueiredo, Maxwell Knifton, James Kyeong and Stéphane Lavoie for helpful discussions and suggestions. Finally, we are grateful to Nicole van de Wolfshaar and Meredith Fraser-Ohman for editorial assistance.


Bank of Canada staff analytical notes are short articles that focus on topical issues relevant to the current economic and financial context, produced independently from the Bank’s Governing Council. This work may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this note are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank.