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Canadian corporate profits will show a big improvement as the third quarter reporting season picks up momentum over the next couple of weeks, according to analysts and portfolio managers. But don’t expect miracles.

Profits generated by companies in the S&P/TSX Composite Index will decline 18.7 per cent in the third quarter, from last year, according to the latest earnings lookahead from Refinitiv.

That would be far better than the bloodbath in the previous quarter, when profits reflected the full brunt of the economic lockdown in the spring, and plunged 41.7 per cent, year over year.

Refinitiv’s analysis also suggests Canadian profits will decline by just 10.6 per cent, year over year, if you don’t include results from the energy sector.

But will the third-quarter results be enough to justify the stock market’s brisk V-shaped recovery since March and soothe investors rattled by soaring COVID-19 infections over the past month?

Canadian National Railway Co. and Canadian Pacific Railway Ltd. will report their results Tuesday, offering valuable insights into demand for products and commodities. Rogers Communications Inc. will report its results on Thursday, followed by Canfor Corp. on Friday.

For investors who follow the bigger market-moving news generated by high-profile U.S. companies, Tesla Inc. reports Wednesday, Microsoft Corp. reports on Oct. 27 and Inc. on Oct. 29 – three tech-heavy companies that have been among the biggest winners this year in terms of share price gains.

In some ways, third-quarter results will likely get far more notice than second-quarter results.

In the previous quarter, expectations were exceptionally low given that much of the global economy had been halted to curb the COVID-19 infection rate. Everyone knew earnings would be awful, and they were.

Now, though, profits generated in July, August and September should reflect a reawakened global economy, improved employment, relatively strong retail spending and outright economic growth in China in the quarter – which sets the bar for North American earnings considerably higher.

What’s more, the third-quarter results arrive when the S&P/TSX Composite is down just 3.9 per cent this year, while the S&P 500 is up 7.3 per cent and hit a record high in September.

“Companies have been influenced very differently by the pandemic,” Jeff Bradacs, portfolio manager of Canadian equities at Picton Mahoney Asset Management, said in an interview.

At one end of the spectrum are e-commerce companies whose services have been in high demand during the pandemic. Mr. Bradacs said he believes that meeting or beating earnings expectations are essential for this group, given the steep valuations of their shares.

But other companies, whose operations continue to suffer, might find that earnings take a back seat to other financial metrics. “In the case of these companies, I think it is less about the quarter and more about financial stability,” he said.

Results from Canadian railways should provide some insight into the underlying strength of the Canadian economy.

Benoit Poirier, an analyst at Desjardins Securities, expects that CN will report a profit of $1.45 a share (after adjustments), well above the 77 cents a share that CN reported in the second quarter but down 11 per cent from last year. For CP, he expects a profit of $4.23 a share, up from $4.07 a share last quarter and down 8 per cent from last year.

“Volumes for both railroads have gradually improved through the third quarter and have been in positive territory for the past three to four weeks, with notable strength in grain, intermodal and potash,” Mr. Poirier said in a note.

The railways could also reintroduce financial forecasts, he said, after withdrawing guidance earlier this year owing to COVID-19-related uncertainties that weighed on many other sectors.

Rogers might not provide such an upbeat report, given the telecom company’s exposure to sports and media (it owns the Toronto Blue Jays, among other sports-related assets), and struggling wireless revenue.

Aravinda Galappatthige, an analyst at Canaccord Genuity, expects Rogers will report a profit of 77 cents a share, down from $1.22 a share last year.

“At a high level, a key question is the extent to which the second wave [of COVID-19 infections] impacts Rogers' financial performance,” Mr. Galappatthige said in a note.

It’s a question that will likely hang over many other companies, too.

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