With Canada's version of the quarterly earnings season about to leave the launch pad, the encouraging early results from south of the border have strategists in this country wondering if the Canadian numbers might be destined for a higher trajectory than previously thought.
The U.S. earnings season is already in full swing, but Canada will play some high-speed catch-up over the next two weeks - fully half of the S&P/TSX composite index's 222 companies are slated to release their first-quarter financial results. By the time the fortnight is over, investors will have a pretty well-rounded view of the Canadian market's earnings health during the first three months of the year.
Like the U.S. market, the Canadian results are expected to contain big year-over-year profit improvements, thanks both to the economic turnaround and the fact that the 2009 first quarter was the low point for earnings during the recession, making for particularly generous year-ago comparisons.
But having seen the raft of pleasant surprises that have rolled out on the U.S. earnings scene over the past couple of weeks, strategists here are thinking that the Canadian market could reveal even better growth than they had been predicting.
"We feel the estimates are still too conservative," said Vincent Delisle, strategist at Scotia Capital in Montreal.
Analysts' consensus estimate for S&P/TSX composite index first-quarter earnings points to year-over-year growth of about 38 per cent. However, some strategists now believe the figure could be 5 to 10 per cent higher than that.
"It's pretty much been the case for a year now - earnings have been coming out well ahead of estimates," Mr. Delisle said. "It's really more psychology than math. There was a very high level of skepticism [fuelled by the downturn]that's still out there."
That trend has certainly held over the first couple of weeks of the U.S. earnings season, where nearly 90 per cent of the S&P 500 companies that have reported to date have beaten consensus estimates. While that trend has emboldened Canadian earnings forecasters, strategists say there are also some key factors peculiar to the Canadian market that suggest it could outpace the U.S. earnings performance.
"One factor is that the economy has picked up even more strongly than expected," said CIBC World Markets senior economist Peter Buchanan, who expects the S&P/TSX earnings to crank out a 45-per-cent gain over a year earlier.
Mr. Buchanan also noted that while the U.S. market continues to see fairly thin revenue growth behind its earnings improvement, the story could be quite different in the Canadian market. That's because the TSX's key natural-resource segments - which make up almost half the composite index by weight - have seen prices for many key underlying commodities surge in recent months.
Mr. Buchanan noted that while the year-over-year growth figures will benefit from the deep weakness of the 2009 first quarter, earnings growth will be much more subdued on a sequential, quarter-to-quarter basis. Indeed, many forecasters have predicted that first-quarter S&P/TSX profits will be flat with or even a little lower than the 2009 fourth quarter.
Mr. Delisle believes the sequential growth figures are more useful for investors to gauge the market's earnings trend than the year-over-year numbers - especially now, with earnings coming off such an unusual couple of years. But he feels the forecasts of flat-to-lower sequential growth only strengthen his argument that the Street is being unrealistically cautious in its Canadian earnings expectations.
"We think it's odd," he said. Given the strong economic improvements in Canada since the year began, "We would expect a better first quarter than fourth quarter," he argued.
Both Mr. Delisle and Mr. Buchanan suggested that the appreciation of the Canadian dollar - which reached parity with the U.S. dollar this month and is up 20 per cent in the past year - has fuelled caution among analysts, fearing the strong currency may have weighed down Canadian earnings and offset much of the benefits of the rebounding economy.
"These fears are overdone, in our view," said Mr. Delisle. He said that, far from being an impediment to Canadian profits, the dollar and TSX earnings have tended to move in the same direction in recent years - reflecting the high exposure both now have to strong prices in resource exports.
Mr. Buchanan noted that most of the export-driven companies on the S&P/TSX composite are resource producers, which have benefited from improving commodity prices as the currency has risen. He said non-resource manufacturers, which wouldn't have received this same offset for their export pricing, only account for about 7 per cent of the S&P/TSX index.