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David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.

I think it’s fair to say that it is widely known that earnings growth is robust in the United States, but what about Canada?

The year-over-year growth rate in the earnings-per-share estimate for the S&P/TSX Composite Index over the next four quarters is running at 19.1 per cent, as of last week. This is not too far off the 22.5 per-cent growth rate for the S&P 500 and 23.8 per cent for the Nasdaq. At the beginning of the year, forward earnings estimates were running at 7.7 per cent, year over year, for the S&P/TSX, 11.6 per cent for the S&P 500 and 16.8 per cent for the Nasdaq. Yet, despite the robust earnings revisions, there is not much in the way of commentary talking about this made-in-Canada development.

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So what exactly has driven the move higher from a sector perspective? The biggest gainers are the ones that would be expected – materials and energy. The former has seen its earnings estimate grow from minus-8.7 per cent at the beginning of the year to 31 per cent currently, while the latter went from 11.1 per cent to 62.1 per cent. The earnings picture has held up quite nicely despite the smaller contribution from financials – having gone from 17.1 per cent to 12.3 per cent. This is not surprising given the slowing we have seen in consumer and mortgage-credit growth but it does speak to the resiliency of the Canadian banks to grow earnings despite slowing loan growth. The only two other sectors to show downward earnings revisions are utilities (6.3 per cent to minus-2.6 per cent) and real estate (10.5 per cent to minus-1.8 per cent). Obviously, the big question is how the recent corrective activity in various commodity prices will cause analysts to curb their estimates. Was this merely a short-term investor positioning response to the tense Turkey situation, or is the Chinese economy slowing down more than anticipated? The latter would pose far greater hurdles to the outlook.

One would expect that the brighter earnings outlook would be rewarded by investors, yet the S&P/TSX has only managed a minuscule 0.5-per-cent return, year to date. The S&P 500 has returned 7.1 per cent and the Nasdaq is up 13.9 per cent by comparison. The explanation for this difference is likely because of all the negative clouds hanging over the country, which have affected investor sentiment. The S&P/TSX does best when there are foreign inflows into the country. In 2016, when the market returned 17.5 per cent, Canada saw $52.5-billion in net inflow that year. The story in 2017 was similar – the S&P/TSX was up 6 per cent that year with an even bigger $56.8-billion coming into the country. This year we are on pace for only $13.4-billion.

There is no shortage of headlines for foreign, and domestic, investors to worry about – tariffs, slowing global economic growth, a rolling over in commodity prices, the apparent exclusion of Canada in North American free-trade agreement talks between the United States and Mexico, a slowing housing market – the list goes on. The silver lining in all of this, though, is that the combination of strong earnings revisions with little price gain on the S&P/TSX has resulted in a 10-per-cent contraction in the forward P/E ratio (14.5, down from 16.2). The risk/reward may start to be shifting for the better. The Canadian stock market is now trading, on a forward P/E basis, below its five-year average and in line with its 10-year average.

The risks mentioned above are starting to become priced in and any positive resolution should reward investors, given the strong earnings backdrop for the S&P/TSX.

With contributions from Marius Jongstra of Gluskin Sheff

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