Aftershocks from crude oil's stunning price slide are expected to be felt in the next few weeks when the world's biggest companies roll out their quarterly earnings.
Diminishing expectations for the energy sector have dragged the profit outlook for the broader S&P 500 to a 4-per-cent drop, from a gain of more than 15 per cent in the same quarter last year.
"It's oil prices. It's hit the whole sector for the entire past year" says Gregory Harrison, research analyst at Thomson Reuters Corp. "It's enough of a factor to bring down earnings for the whole index."
Thomson Reuters compiles earnings estimates from analysts who cover the S&P 500 and TSX 60, and the companies themselves. Their data show that earnings expectations in the energy sector for the most recent quarter fell from a 13-per-cent gain a year earlier to a 65-per-cent loss. The only bright spots in the sector are oil refineries and energy marketing.
"The refiners are still expecting to grow earnings, but [with] the other ones – drilling, equipment services, exploration, integrated, storage – big declines in earnings are expected," Mr. Harrison says.
Resource companies dealing in other commodities are likely facing worse. "Metals and mining is negative 92 per cent, gold is negative 64 per cent, steel is negative 37 per cent, aluminum is negative 51 per cent," he says.
On the bright side, Mr. Harrison says the bad news in the resource sector masks an otherwise solid quarter for the other sectors. "If you look at earnings expectations without the energy sector it would go from negative 3.9 per cent to positive 3.7 per cent," he says.
The sectors pulling up the S&P 500 include consumer discretionary, which is expected to lift earnings by 11 per cent over the third quarter of last year. Retailers are reaping the benefits of low borrowing rates and – in the case of auto makers – low commodity prices.
"Automobile manufacturers are expected to do well at 52-per-cent growth," Mr. Harrison says. "That's one of the benefits of low oil and gas prices. People are buying cars and replacing them more often."
Other sectors showing strength in the third quarter include Internet retailers, home builders and financials, according to Thomson Reuters. The big diversified U.S. banks are expected to post earnings growth of 42 per cent over the same quarter last year.
Canada's financial sector is expected to reap some of the benefits of a stronger economy in the United States despite its heavy exposure to the resource-dependent Canadian economy. While the TSX 60 energy sector is headed for a 46-per-cent drop in earnings, Thomson Reuters says the TSX 60 financial sector is expected to report a quarterly gain of 12 per cent.
"I don't think it's going to be a great quarter. Let's call it a lacklustre one," says Robert Sedran, a financial services analyst with CIBC World Markets.
He says expenses for the big banks are usually bigger in the third calendar quarter because it is their fourth fiscal quarter. "Q4 is always is a bit of a sloppy quarter," he says.
Mr. Sedran says low commodity prices, "softness" in the capital markets and expenses from defaulted loans will be a drag on revenue, but not enough to prevent the banks from turning in healthy profits. The banks on the firmest ground are those with the most exposure to the U.S. market and the strong U.S. dollar, he says.
"We think the U.S. economy and operating environment is healthier than the Canadian one at this time," Mr. Sedran says.
Toronto-Dominion Bank has a great deal of exposure to the United States after it took advantage of the strong Canadian dollar and bought up U.S. financial assets in the wake of the 2008 global financial meltdown. TD is "overexposed to the United States relative to its peers," Mr. Sedran says.
Other banks expected to benefit from strong U.S. exposure are Bank of Montreal and Canada's biggest bank, Royal Bank of Canada. "We think RBC's strength in diversification helps it navigate that uneven operating environment," he says.
While Canadian bank earnings have weathered the commodity meltdown, their stocks have not. In August alone they lost between 7 per cent and 13 per cent of their value.
Mr. Sedran says the banks are oversold and prices are low compared with future earnings expectations. "We're reasonably comfortable with the valuations. We think they have a decent chance to actually show relatively well."
Banks are the most widely held stocks by Canadian retail investors, either directly or through mutual funds, partly because of their generous and growing dividends.
Mr. Sedran says bank dividends might not be increased this quarter, but investors can rest assured the yields are safe. "I can't develop a scenario in which the dividend is at risk. Let's not forget coming through the liquidity crisis not a single bank was ever really at any meaningful risk of cutting their dividend."