Fourth quarter earnings have come in better than expected, but Bay Street analysts are divided over the outlook for 2005.

Almost three-quarters of the S&P500 companies have already reported Q4 earnings, and it is estimated that operating profits expanded 19.8% year-over-year. This is beating the 18% gain analysts expected last week and well ahead of the 15.5% estimated at the start of the quarter, according to National Bank Financial.

However, looking ahead to the first quarter of 2005, NBF says the earnings outlook is already more challenging. It reports the ratio of negative-to-positive is 2.1, up from a ratio of 1.8 at the same point in time in Q4, and just above the long-term average of 2.0. “As a result, analysts cut their growth forecast for Q1 to 6.9% (from 7.6% on Jan 1)”, NBF says.

“Despite this downgrade, it is worth noting that bottom-up estimates compiled by First Call continue to call for operating earnings growth of 9.7% in 2005,” NBF adds. “On a sectoral basis, leadership is expected to come from materials (+25%) and industrials (+17%), two sectors that posted hefty returns in 2004. At the other end of the spectrum, energy is expected to be the worst performer in 2005 with a 4% decline in profits.” Energy saw profits jump 56% last year.

Contrary to NBF’s view, BMO Nesbitt Burns is raising its earnings forecast for the S&P/TSX, based on a lower than expected Canadian dollar and higher than expected oil prices. “Correspondingly, our target price climbs 250 points to 9,750,” Nesbitt says. “Despite the increase, the target and its underlying assumptions remain conservative,” Nesbitt says, and it remains 65% in equities for its recommended asset mix.

Nesbitt has also boosted it earnings forecast for the S&P 500, “which in conjunction with lower bond yields lifts its target to 1250.”

The Steel sector is downgraded to Market Perform, the materials sector remains attractive for base metal, chemical and lumber exposure, Nesbitt says.

“Our strategy also embraces industrials (for transports and capital goods), consumer cyclicals (media, retailing, consumer durables and apparel), energy (integrateds and services) and non-bank financials.”