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Behind the Numbers

If the TSX breaks your heart, this could be why Add to ...

About a dozen years ago, the short-lived Canadian pop band soulDecision released a song called Gravity– in which the vocalist announced that if he couldn't woo the girl of his dreams, “I can put the blame on gravity.”

Investors won't take excuses like that. When it comes to poor market performance, we want to be able to identify the culprit.

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This week, National Bank of Canada released its outlook for earnings on the S&P/TSX composite index, and its projections for third-quarter growth don't look too great. The bank predicts profit of $26-billion for the 239 companies, down 8.3 per cent from the same quarter last year.

What's to blame for this slide in earnings? One of the main heart breakers is the energy sector, which is projected to see a 24.6 per cent drop in net income. Another disappointment is the materials sector, which is poised to see its third-quarter earnings fall 27.1 per cent. The two sectors combined make up about 45 per cent of the TSX.

(Other sectors will also see their earnings fall, but with a smaller impact on the overall index. For instance, National Bank projects that the information technology sector's earnings will tumble a whopping 77.5 per cent. However, the tech sector only represents about 1 per cent of the index weight.)

The energy sector is down in the dumps for good reason. Oil prices are back to roughly where they were a year ago, while natural gas prices are still in a funk, falling from around $4.20 (U.S.) per million British thermal units in the third quarter of last year to $3.39 on Friday.

The energy industry can share its sob stories with the materials sector, which has been hard hit by declining prices for many metals and other commodities. The Thomson Reuters/Jefferies CRB Commodity Index sits at 296.84, down from nearly 350 during last year's third quarter.

The National Bank report suggests that not all sectors are lovelorn, though. It projects the utilities sector will see a 154.2-per-cent jump in earnings, to $276-million (Canadian), while the health care sector's profits will rise 52.7 per cent to $462-million.

There's some more positivity to be found in National Bank's fourth- quarter projections. It predicts the composite index's earnings will bounce back to $29-billion, which is 7.8 per cent greater than the same quarter in 2011. “Analysts are keeping relatively high price expectations” for the quarter, said Matthieu Arseneau, senior economist with National Bank, who noted it's still early enough to revise the quarter's projections downward.

The TSX will no doubt get through this rough patch – unlike soulDecision, which reportedly broke up in 2005.

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