Companies that make and move things are now a bigger part of Canada’s stock market than those that dig them up.
Industrial stocks such as Canadian National Railway Co., ATS Automation Tooling Systems Inc. and plane maker Bombardier Inc. have surpassed materials as the third-largest sector on the S&P/TSX Composite Index for the first time in at least 17 years.
The move comes as industrial stocks feed off a booming Canadian and U.S. economy while miners slump with declining metal prices. It’s a major shift for the benchmark which has been dominated by the so-called big three – financials, energy and materials – since the market was first divided into sectors in 2001.
While industrials are on the rise, Canadian companies had a poor second-quarter earnings season compared with the U.S. Only 49 per cent of companies on the benchmark beat profit expectations, compared with 81 per cent for the S&P 500 Index, according to data compiled by Bloomberg.
Industrials now make up 10.4 per cent of the benchmark after 65 per cent of companies beat second-quarter earnings expectations, pushing the sector to a gain of 11 per cent this year. CNR and Canadian Pacific Railway Ltd. were the companies most responsible for the sector’s gain.
Canada’s materials index by contrast has fallen 8.4 per cent since the beginning of the year and now accounts for 10.3 per cent of the S&P/TSX benchmark, as metal prices from copper to aluminum have slumped with a slowing Chinese economy. Gold miners Barrick Gold Corp. and Agnico Eagle Mines Ltd. had the most influence on the sector’s decline as gold prices slumped. Only 36 per cent of materials stocks beat earnings expectations, the data show.
While volatile materials and energy make up 30 per cent of the Canadian market, they account for just 8.4 per cent of the S&P 500, which may explain the divergence in earnings performance between the two countries, said Robert Kavcic, senior economist at BMO Capital Markets.
“The flip side of that is if you look at consumer discretionary and technology, where all the strength was in the U.S., that just so happens to be the areas of the Canadian index where we’re very much underrepresented,” Kavcic said.
Canada’s underperformance may also be related to the growing gap between the two economies.
“Canada is coming off a period of very strong economic growth and it’s slowing down, whereas the U.S. was coming off a soft patch and has been accelerating through the second quarter,” Kavcic said. “It could be the case that expectations in the U.S. were still catching up to the acceleration in growth, whereas in Canada they’re still catching up to the deceleration in growth.”