Reduced earnings expectations are easier to beat, which is one reason for investors to remain cautiously optimistic about the Toronto Stock Exchange, says a new report from CIBC World Markets.
The report says that since the start of the year, while analysts have raised their median expectations for certain sectors such as health care and REITs, they are aggressively downgrading expectations for the TSX’s cyclically oriented sectors. For example, expectations for 2012 earnings in the energy and materials sectors have fallen by about 5% and 20%, respectively. Forecasts for the tech sector have fallen, too. Overall, market expectations are down by about 7%, CIBC says.
However, the report suggests there are signs that the pendulum may have swung from undue optimism towards excessive caution. It says the CIBC Leading Indicator, which is based on nine economic and financial variables that have historically foreshadowed index earnings movements, is signaling a 13% rise in earnings for the TSX this year.
“The 13% rise in TSX earnings implied by our leading index is about 2%-pts above the latest bottom-up estimate, derived from analysts’ collective projections for individual companies. Lower expectations walls are easier to climb than higher ones. The potential for more firms than usual to beat the street’s increasingly beaten-down expectations is a reason we remain cautiously optimistic on the TSX’s fortunes in 2012,” the report concludes, adding that the TSX’s current forward price-earnings ratio of 13 suggests stocks aren’t expensive (versus a long-term average of 14.4).