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Overall earnings per share is expected to decline by 3.7 per cent from the same quarter last year for companies in the S&P/TSX Composite Index, according to Refinitiv data.

The Canadian Press

With Canadian stocks having their strongest year in a decade, a pivotal earnings season will put those gains to the test in the weeks ahead.

The torrent of third-quarter financial results gets started this week, and the expectations going in are low.

Over the past year, profit forecasts for the Canadian market have declined relentlessly in the face of weakening global growth, the U.S.-China trade war, a slowdown in manufacturing, low oil prices and a soft patch in the domestic housing market in some areas.

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Canadian earnings, as a result, are “running out of steam,” Hugo Ste-Marie, a strategist at Scotia Capital, said in a report.

For companies in the S&P/TSX Composite Index, overall earnings per share (EPS) is expected to decline by 3.7 per cent from the same quarter last year, according to Refinitiv data.

But there are more favourable conditions on the horizon, as this year’s pressures on the corporate sector are expected to give way to an earnings recovery next year.

“The focus will soon turn to 2020,” Mr. Ste-Marie said. “We expect TSX EPS growth to reaccelerate as … monetary easing engineers a macro-recovery.”

Global central bankers have shifted into stimulus mode in recent months as the economic fallout from the trade war has spread.

The clearest casualty of the competing tariffs between the United States and China has been the manufacturing sector.

In October, the JPMorgan Global Manufacturing PMI came in below 50 for the fifth consecutive month, the longest stretch of falling output in seven years.

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The threat of a factory slowdown sparking a broader global recession has fuelled rate cuts around the world, with nearly 60 per cent of global central banks lowering policy rates in the third quarter – the highest share since the aftermath of the 2008 global financial crisis, according to UBS.

That’s one big reason equity markets have generally been resilient this year, even as earnings estimates have plummeted, said Shane Obata, a portfolio manager at Middlefield Capital.

The S&P/TSX Composite Index is up by 14.3 per cent year to date – the best performance over that specific time period since 2009 – while the S&P 500 index has risen by 19.1 per cent.

“Are investors complacent, or are they getting more comfortable with the risks in the market? I tend to think it’s the latter,” Mr. Obata said.

After all, Canadian and U.S. job markets remain strong, the U.S. consumer is still in good shape, and signs of a global recession have yet to emerge.

In the corporate sector, the pain has been largely contained, as well, said Brian Belski, chief investment strategist at BMO Nesbitt Burns.

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“Potential earnings weakness is still largely localized to trade-centric areas,” Mr. Belski said in a note, pointing specifically to the industrials sector and Canadian auto parts companies.

Barring a significant deterioration in overall global economic conditions, the market is setting up for a rebound in profits, Mr. Obata at Middlefield said.

“Assuming we don't go into a recession, this is probably the low point for earnings growth.”

Here are some of the key Canadian sectors to watch through earnings season:

Energy

The upward spike in global crude prices, resulting from the attack on the world’s largest oil processing facility in Saudi Arabia, proved to be short-lived.

Oil price averages actually declined in the third quarter from the previous quarter, setting the Canadian energy sector up for another tough reporting season.

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“Given we are living in a curtailed world, the opportunity for upward surprises is relatively low,” CIBC World Markets analyst Jon Morrison wrote, referring to Alberta’s mandatory oil production cuts.

In that kind of environment, energy investors will continue to prioritize free cash-flow generation and returning money to shareholders.

Financials

The big banks operate on a different fiscal year than most of Corporate Canada, and won’t report for another six weeks or so.

But given their weight within the index, the banks can make or break Canadian earnings season. And they may be set up to beat expectations when they do report, Mr. Ste-Marie at Scotia Capital said. “Consensus appears a tad conservative following the release of the latest housing data.”

A rise in national real estate volumes should help improve loan originations, he said.

Materials

The fortunes of this sector this earnings season are likely to be split between gold miners and the rest.

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While gold reached its highest price in more than six years in the quarter, low commodity prices continue to weigh on the base metal, lumber and chemicals subsectors.

Industrials

The railways are feeling the effects of the trade war and manufacturing slowdown, with overall volumes declining in the third quarter.

Investors will be keen for guidance from management about the potential for a rebound in freight volumes in the coming months.

“The key will be whether a number of non-cyclical commodities can bounce back,” CIBC analyst Kevin Chiang wrote, citing Canadian grain, crude oil and potash as focal points.

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