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As bad as earnings season has been, it is just a taste of what is to come.

Corporate profits in Canada contracted by an estimated 17 per cent in the first quarter, compared with the same period last year. The decline in U.S. earnings, meanwhile, is pegged at 12 per cent for companies in the S&P 500 index, according to Refinitiv data.

First-quarter results incorporate only the very beginning of the economic lockdown. Subsequent quarters will reveal the true level of profit destruction being wrought by the pandemic and the resulting economic recession.

And it promises to be harsh. The second-quarter contraction in Canadian profits is expected to approach 40 per cent.

Still, stock markets in both countries are absorbing the shock with a level of calm bordering on indifference.

“Investors are giving a pass on these earnings because they believe they’re temporary, it will last a quarter or two, and then we’ll start to recover,” said John Zechner, president of wealth management company J. Zechner Associates. “The bigger risk comes a little further out.”

For many Canadian companies, the start of the year was shaping up just fine, right up until mid-March.

The companies in the S&P/TSX Composite Index were expected to post an 18-per-cent increase in first-quarter profits, until social and commercial restrictions were implemented to slow down the spread of the coronavirus that causes COVID-19.

Just a little more than two weeks of economic lockdown was enough to spoil the quarter.

Nearly every sector of the Canadian stock market had a violent decline in profits, with consumer cyclicals and financials hardest hit.

Some consumer discretionary names face an existential threat, as many consumers have been either unable to shop or unwilling to spend on non-essentials.

Gildan Activewear Inc., for example, posted a US$99-million loss in the first quarter, as sales of its apparel plunged and some of its U.S. plants had to be shut down. The continuing decline in demand means Gildan will also likely face a “significant earnings loss” in the second quarter, the company said in a call in late April.

And Cineplex Inc., which temporarily shuttered its chain of theatres, deferred filing its quarterly financial statements, saying the impact of the pandemic “cannot be quantified at this time.”

Shares in both companies have declined by more than 50 per cent since the market sell-off began in mid-February.

The financials sector, meanwhile, is closely tied to the state of the overall economy, and is also hurt by falling interest rates, which tend to lower bank profits, as well as a potential wave of loan defaults by impaired borrowers.

Earnings season for the Canadian banks kicks off on May 26, when Bank of Nova Scotia and National Bank of Canada are set to release quarterly financial statements, followed by the rest of the Big Six over the following three days.

Those results will incorporate much more of the economic recession than the rest of the corporate sector, as the banks’ fiscal quarter ended one month later.

The earnings hit, as a result, will be severe. Core earnings per share are forecast to decline by 82 per cent compared with last year’s first quarter, RBC Dominion Securities analyst Darko Mihelic said in a note.

“All Canadian banks will assume a base case scenario with a recession resulting in a significant increase in credit risks across their portfolios,” Mr. Mihelic wrote.

Provisions for credit losses should increase fivefold from the previous quarter, to roughly $10-billion in aggregate across the group.

“If it’s around that, I think people are going to be okay with it,” Mr. Zechner said. “If it’s substantially higher, look out.”

The overall market’s resilience to the profits slide has also thrown valuations out of whack, said Les Stelmach, a portfolio manager at Franklin Templeton Canada.

For the Canadian market as a whole, the consensus estimate for full-year 2020 earnings has declined by about 30 percentage points since the start of the year, while the S&P/TSX Composite Index is down by less than 15 per cent over that same time.

“We entered the year with market multiples pretty high,” Mr. Stelmach said. “It’s an even higher multiple now. It’s a really weird time.”

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