Upcoming earnings reports will mark the end of the earnings recession in Canada, according to a new report from CIBC World Markets. After four down quarters, operating profits for S&P/TSX composite companies are expected to be up 43% when earnings for the final three months of 2009 are tallied.
“The gain for the TSX looks like a tough wall to climb, but will in fact benefit hugely from an easy comparison with a year earlier, when both the Canadian and global economies sank into recession, dragging commodity prices and profits down,” CIBC senior economist Peter Buchanan said Monday.
He noted that TSX earning will only need to rise by five to six per cent from the previous quarter to meet expectations. The economist expects the bulk of the gains will be driven by the insurance and mining sectors, which should account for about three quarters of the total year-on-year rise in earnings.
Insurers lost more than $1-billion in the fourth quarter of 2008 as a result of adjustments on segregated funds and other assets and liabilities. He noted that the sector should see a positive swing in profitability of well over $3-billion.
The diversified mining group, meanwhile, is forecast to see a $1.5-billion year-over-year improvement as a result of the strong metals-led rally in commodity prices.
Mr. Buchanan feels that the greater challenge may not be this quarter, but rather the targets for the coming year. Analysts on both sides of the border have been raising their near-term expectations for earnings in response to improvements in the economy and commodity prices. In Canada, positive revisions have accounted for 53% of all revisions for the quarter ahead, while that number is 73% in the United States.
“That suggests more of the positive news may already be priced into stock valuations than a few quarters ago, limiting the potential for stocks to rally strongly on the upcoming reports,” he said. “Although such increases have occurred after past recessions, that has generally been in the context of stronger economic recoveries than we expect this time, given the drag from a scaling back of fiscal stimulus programs in both Canada and the U.S.”