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Scotiabank strategist Hugo Ste-Marie believes profit estimates for the TSX are far too optimistic and set to be revised lower, providing a significant overhang to the domestic stock market in 2024.

Mr. Ste-Marie reported that consensus earnings estimates for the upcoming third quarter earnings season have “been in an almost constant downward march since last year.” As it stands, expected profits of C$351 per share would mean 7 per cent growth versus the previous quarter after four consecutive declines. This compares with over $400 per share predicted last November. Year over year, profits are forecast to come in 1.3 per cent lower.

Scotiabank is very concerned that earnings estimates for 2024 are dependent on overly optimistic profit margins. These margins have been falling rapidly since hitting an all-time high during the first quarter of 2022. Current margins are 11 per cent. Mr. Ste-Marie calculates that even if profit margins improve to 11.7 per cent, 2024 earnings would fall 8.4 per cent below current predictions (all else equal). Market conditions would be weaker if margins dropped to 2019 levels of 10.4 per cent.

The strategist has specific concerns about the banking sector. He notes that provisions for credit losses (PCLs), which are subtracted directly from earnings, have exceeded analyst expectations for the past two quarters. Growth in PCLs will have to stabilize before sentiment improves in this all-important sector.

Mr. Ste-Marie also sounded a note of caution about the quality of Canadian earnings – the reported results compared with results that are compliant with Generally Accepted Accounting Principles (GAAP). Corporations are using one-time charges, impairment charges and non-cash expenses to boost profit results relative to conservative accounting standards.

Scotiabank’s pessimism on earnings is in part predicated on their belief in a slowing domestic economy next year. Higher-than-expected growth would, of course, help offset their anxiety about profit growth. Even so, investors should pay careful attention to the reliability of their earnings growth assumptions for portfolio holdings.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Crescent Point Energy Corp. (CPG-T) Benefiting from a rising oil price, the share price of this energy producer has rebounded sharply, delivering one-year, two-year and three-year returns of 20 per cent, 86 per cent and 598 per cent, respectively. Income investors have a lot to like here: it pays a quarterly dividend of 10 cents per share, equating to a current annualized yield of 3.5 per cent. And over the past year, the company has also paid its shareholders three special dividends of 3.5 cents per share each time. Jennifer Dowty delves into the investment case for the stock.

Tesla Inc. (TSLA-Q) Elon Musk’s warning that high interest rates could sap electric-vehicle demand knocked shares of the sector on Thursday and made for a brutal week for Tesla shares. Some analysts are now questioning if Tesla can maintain the runaway growth that has for years set it apart from other automakers.

The Rundown

It’s raining 5 per cent GICs – even the big banks are offering them

Promotional rates from some big banks mean you can get a five-year guaranteed investment certificate with a return of 5 per cent. And even when there’s no promotional rate, here’s something not as widely known about dealing with the big banks: just ask and you might get a better deal, says Rob Carrick.

It’s not a fake out. Inflation’s fade is for real

While Canadian inflation’s surprise September slowdown sparked some optimism – and fanned Bank of Canada rate pause chatter – many remain skeptical. A similar situation is unfolding in the United States and the euro zone. But in the eyes of billionaire Ken Fisher, rampant inflation fears are still adding bricks to this bull market’s wall of worry. He thinks the market is in for a positive surprise. Expect inflation rates to irregularly keep cooling – and stocks to eventually reignite.

Falling stocks, climbing mortgage rates: how 5% Treasury yields could roil markets

Relentless selling of U.S. government bonds has brought Treasury yields to their highest level in more than a decade and a half, roiling everything from stocks to the real estate market. Here is a look at some of the ways rising yields have reverberated throughout markets.

Also see:

Buying a burst bubble, bruised bond bulls wince

Longer-duration bonds attractive amid widening spread as recession looms: PIMCO strategist

Bond buyers dip toes in long-term Treasuries despite higher-for-longer rate fears

U.S. airline investors worry the travel boom may be ending

It should be the best of times for U.S. airlines with a travel boom still going strong, but investors are nervous demand may soften as the economy falters, making it harder to protect profits from soaring costs. As Reuters reports, those concerns have battered airline stocks even as earnings reports point to a continuing consumer appetite for travel.

After U.S. IPO stumbles, companies under pressure to offer bargains

Companies pursuing U.S. initial public offerings (IPOs) after a string of lackluster stock market debuts are receiving advice from investment bankers to lower their valuation expectations.

Others (for subscribers)

Fund manager Emerge Canada set to wind down ETFs after efforts to sell company

The highest-yielding stocks on the TSX, plus risk data

Number Cruncher: 13 financial stable stocks

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Friday’s Insider Report: Director cashes out $14-million from this large-cap consumer staples stock

Ted Dixon: Total Energy Services insiders bought the early October Energy sector dip

Monica Rizk: Bullish on Canadian Natural Resources

Globe Advisor

Why this $23-billion money manager is adding more tech and consumer discretionary stocks to portfolios

Why this advisor kept her poor upbringing a secret – and how it influenced her relationship with money

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis.

Ask Globe Investor

Question: When reading about rate reset preferred shares, it seems that on their reset date some investors are given the option to convert to a new floating rate preferred. But some are simply redeemed. Is there any way to know ahead of time if the institution is going to redeem the rate reset (as the new rate will be too high for their liking), or if they will offer the option to convert? – Nathan S.

Answer: There is no way to know in advance what an issuer will do. Investors must wait until an announcement is made. As for an option to convert at the reset date, check the issue’s prospectus. If such a choice is available, it may be explained there.

--Gordon Pape (Send questions to gordonpape@hotmail.com and write Globe Question on the subject line.)

What’s up in the days ahead

Canadian banks are cutting jobs. For investors, that could be good news. David Berman will tell us more.

Another curve ball for markets: World investing themes for the week ahead

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

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Compiled by Globe Investor Staff

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