Bay St. earnings to outstrip Wall St.

(October 19, 2004) Canadian corporate earnings are set to outstrip those in the U.S. as third-quarter earnings season gears up, thanks to soaring commodity prices, according to CIBC economists.

Due to the heavy weighting assigned to our resource sector, the price-to-earnings ratio for the entire TSX Composite Index could be affected, making Bay Street more attractive than Wall Street.

“We expect the final reported TSX numbers to once again top analysts’ generally conservative last minute estimates, tipping the scales at around 35%,” writes CIBC World Markets economist Peter Buchanan. “That would surpass Q2’s 33% advance, and is twice the latest 14% year-on-year ‘bottoms-up’ estimate for the S&P 500.”

While the fourth quarter should see the earnings growth slow down, Buchanan predicts a rate of 25%, which would work out to a rise of almost 29% for the full year. In 2005, he calls for the TSX earnings growth to slow to a more sustainable rate of between 11% and 12%.

“Don’t count on that commodities party lasting a whole lot longer,” says Avery Shenfeld, senior economist, CIBC World Markets. “There are varying opinions on the current state of Chinese demand, but that huge source of support will clearly be less exciting ahead. The People’s Bank was talking this week about using more traditional economic measures — read interest rate hikes — to quell an inflationary overheating.”

But it’s not just China that threatens global economic growth. Shenfeld also points to sluggish industrial activity in Europe, rate hikes in the U.K. and the lack of economic stimulus available in the U.S.

“We see several potential threats, including the fact that high crude oil prices have historically been bearish for other resources due to their drag on global growth,” wrote Buchanan.

Of course, the TSX is not all just rocks and trees. The most heavily weighted sector, the financials, is expected to continue to be popular with investors seeking investment yield. Consensus estimates call for earnings to rise by about 10% next year, while Q3 2004 will likely lag with 6% growth.

The consumer staples sector should expect “Q3 earnings effectively flat on the year.” Buchanan has also trimmed earnings expectations for the tech sector.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com