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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Credit Suisse analyst Joo Ho Kim assesses the implications of U.S. banks earnings for the domestic banks,

“We believe the trends from the U.S. banks’ Q1/23 earnings were a modest negative for BMO and TD (i.e. the Canadian banks with a more significant US earnings exposure) given the slowdown in PTPP [ pre-tax, pre-provision] earnings growth, which was driven by a much less impressive margin improvement and slower loan growth. Meanwhile, the reserve builds across the U.S. banks looked lite in our view, particularly given the heightened volatility in the macro-outlook brought forth by the regional banking ‘crisis’ in March. That said, more modest build in allowances could help offset some pressure on the bottom line … for the Canadian banks if similar trends persist for the group. Lastly, investment banking results were no surprise given the tough market conditions, while heightened volatility helped trading activities again this quarter (positive for NA given its greater trading revenue exposure vs. peers).”


Scotiabank strategist Hugo Ste-Marie detailed the deteriorating outlook for Canadian corporate profitability,

“Profitability is expected to continue to erode further entering 2023. According to Bay Street’s consensus, TSX Q1/23 EPS is expected to tumble 7.6% quarter-over-quarter to $335. On a year-over-year basis, Q1 earnings growth is expected to contract 11%, a visible reversal from a peak growth rate of +127% year-over-year in Q1/21. We note that: Half of TSX sectors display weak/negative YoY trends in Q1/23, sell-side consistently slashing estimates (across most sectors), earnings quality quickly deteriorating, most macro indicators are flashing red… Our sectorial profit regression model based on macro indicators suggests low odds of potential beat at the index level. Overall, we see higher odds of miss for Energy, while Materials, Financials, Industrials, and Discretionary could deliver more in-line results”

“Outlook for Canadian profits is ... not terrific (Scotiabank)” – (research excerpt) Twitter


Morgan Stanley chief strategist Michael Wilson summarized where we’re at for U.S. profit growth,

“Over the last 3reporting seasons, stocks have sold off into earnings season and then rallied on ‘better than feared’ results. In short, stocks have de-rated lower going into earnings but then re-rated higher as companies jumped over the lower earnings expectations for the quarter. The process then repeats itself as the next quarter’s estimates are revised lower into reporting season. In our view, that pattern is changing this quarter for 2 main reasons: 1) 1Q23is now expected to be the rate of change trough. Based on current consensus forecasts, S&P 500 1Q23 EPS growth is expected to come in at -9% y/y while 2Q is expected to be better at -4%. Meanwhile, 2H23 is expected to grow high single digits. With that kind of progression in expected EPS growth, it is not surprising that investors have been unwilling to sell into 1Q results as they believe this is as bad as it gets. We would agree with that conclusion if we believed the consensus forecasts. Unfortunately, our forecasts are more pessimistic, and we don’t expect the trough rate of change EPS growth quarter until 3Q or 4Q … So far during this earnings season, stocks have traded more in line with the fundamentals than over the past several quarters. Some of this is due to the fact that the index has traded well into reporting season rather than selling off like it did into the past several quarters. For our more tactically oriented clients, we think this dynamic poses a near-term risk for stock prices given our more pessimistic outlook for earnings this year, especially as the liquidity picture becomes less accommodative.”

“MS’s Wilson ... still bearish” – (research excerpt) Twitter


Diversion: “This is the latest list of the top-grossing concert tours” - A Journal of Musical Things

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