As ugly as this earnings season has been, the second quarter saw Canadian companies pull off a minor miracle.
Despite the quarter’s colossal challenges – a once-in-a-century pandemic, the full weight of a global lockdown, entire industries shuttered, mass layoffs and possibly the worst global economic shock since the Great Depression – corporate Canada managed to eke out a modest gain in profits.
About 80 per cent of Canada’s largest publicly listed companies have now reported results for the second quarter, and total earnings are on track to rise about 8 per cent over the first quarter of the year.
U.S. companies, meanwhile, have just posted their biggest earnings beat on record, with more than 80 per cent of S&P 500 Index names blowing past analysts’ forecasts.
To be clear, this reporting season was awash in red ink on both sides of the border, and it will take several more quarters before North American earnings get anywhere close to prepandemic levels.
But a corporate rebound is undeniably under way.
“It really is remarkable just how well the corporate sector has been able to weather this crisis,” said Adam Butler, chief investment officer at ReSolve Asset Management in Toronto.
The resilience of large corporations is the result of equal parts economic resurgence – as COVID-19 constraints have gradually eased since midway through the quarter – and, on the cost side, budget cuts and layoffs.
As long as the pandemic does not intensify to the extent that it requires another round of sweeping restrictions, a little over a year from now, U.S. and Canadian profits should be on the cusp of a full recovery.
The speed of the earnings comeback can be traced to the lavish stimulus with which countries confronted the pandemic.
Facing a depression-order hit to GDP, governments and central banks unleashed spending programs and asset purchases designed to prevent a collapse of consumer and investor confidence.
Corporations captured much of that stimulus, through direct transfers and subsidies, and indirectly through consumer spending.
“This does not feel like past recessions,” said Lorne Steinberg, president of Montreal-based Lorne Steinberg Wealth Management. “Governments are paying people to stay home. And banks are giving people a break on making mortgage payments.”
The U.S. consumer has regained the desire to spend, with three straight months of gains in the retail sector taking total spending back to what it was in February.
Canadian consumer spending also hit a milestone in July, surpassing levels it reached in the same month last year, according to RBC Economics.
“A nascent recovery in Canadian consumer spending solidified through the end of July, as more sectors of the economy reopened and government benefits continued to support consumer spending,” RBC economist Colin Guldimann wrote in a report.
Retail spending alone, however, can’t rescue the economy. The recession is still very much alive, measured by either GDP growth or by corporate profits.
Second-quarter earnings for S&P 500 Index companies declined 34 per cent year over year, according to Refinitiv data. Still, it was not quite as bad as Wall Street was anticipating.
“Markets don’t care about the absolutes of good or bad. Rather, markets care about better or worse,” Richard Bernstein, chief executive of Richard Bernstein Advisors, a New York-based investment manager, said in a recent note.
A little over a month ago, the consensus forecast was for a 43-per-cent hit to U.S. earnings. An upside revision that big is like stock market rocket fuel, and this earnings season roughly coincided with an 8-per-cent gain in the S&P 500, putting the benchmark on the verge of a record high.
Big Tech has been at the forefront of both the U.S. stock market rally and the recovery in profits. Both Facebook Inc. and Amazon.com Inc. posted a doubling of second-quarter earnings, in each case amounting to US$5.2-billion.
The Canadian technology sector has also taken on a higher profile in the pandemic economy. Shopify Inc., with a market capitalization of $157-billion, saw its revenue double in the second quarter.
Smaller Canadian tech names have also capitalized on the shift to e-commerce and digitized payments. Lightspeed POS Inc., the cloud-based retail and restaurant point-of-sale service provider, said revenue rose 51 per cent in the quarter ending June 30.
“Lightspeed has been a clear beneficiary of these digitization tailwinds,” CEO Dax Dasilva said on an earnings call last week. “It is a moment to be seized on, facilitated only by the right technology.”
Still, the publicly traded tech sector in Canada beyond Shopify is far too small to sustain the entire market, as in the U.S. Instead, the mining industry has been the MVP of Canadian earnings season.
Amid the best run in gold prices in a decade, Canadian precious metals miners have led both the earnings rebound and the rally in Canadian stocks over the past few months.
Of the biggest North American-listed gold miners, only one – Kinross Gold Corp. – failed to meet or beat earnings forecasts. That outperformance was all the more remarkable considering the pandemic-related jurisdictional lockdowns, which resulted in an overall production decline of about 16 per cent, according to Scotia Capital analyst Tanya Jakusconek.
“Given the rapid changes that have occurred in the world as a result of the pandemic, the gold companies have adjusted very well,” Ms. Jakusconek said in a note.
And it’s not just gold that’s on a tear. Across the spectrum of commodities, there has been a global price resurgence as the Chinese economy has bounced back and manufacturing activity has picked up.
Resources sectors have essentially kept the Canadian market rally going, especially as the big banks have been hit with a wave of credit risk and the impact of low interest rates. (Canada’s banks report quarterly earnings later this month.)
A commodity boom in the months ahead would go a long way toward fuelling Canadian equity returns.
“We could see some version of the cycle we had from 2003 to mid-2008 – the financialization of commodities as an asset class, which could lead to another sustainable commodity cycle,” ReSolve’s Mr. Butler said.
“Canadian investors should be praying for that, because there aren’t any other obvious catalysts for a major resurgence of Canadian equity strength.”
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