Bay Street should continue to outrun Wall Street in the earnings race, on the strength of its heavy reliance on natural resources and financial stocks, according to a new report from CIBC World Markets Inc.

“The energy, materials and financials sectors’ nearly two thirds share of TSX market cap means high prices for oil and other resources and low yields create a constructive backdrop for Toronto-listed stocks,” CIBC says in its Q# Earnings preview released last week.

“These pluses along with the still-healthy economy should help to keep Bay Street’s earnings parade marching to an appreciably faster beat than Wall Street’s in Q3.”

The firm says that the consensus expectations are for a 32% rise in third quarter earnings. It is on the high side of consensus, calling for a 35% gain. “That would surpass Q2’s 33% advance, and is twice the latest 14% year-on-year ‘bottoms-up’ estimate for the S&P 500,” it notes. “A further 25% year-on-year gain in TSX Composite earnings in Q4, in line with our expectations, implies a rise of about 29% for the year as a whole, nearly matching 2003’s buoyant pace.”

The firm then expects TSX earnings to decelerate to the 11-12% range in 2005. However, it points out that’s still appreciably above the 6% trend of the last two decades.

Energy remains the big winner. The consensus now anticipates over 40% year-on-year earnings growth in Q3, double expectations three months ago. “Multi-year peaks for gold and most base metals mean that projections in the materials sector have been ratcheted up almost as much as in the oil patch,” it says.

Although it sees several potential threats to the metals euphoria, including the fact that high crude oil prices have historically been bearish for other resources due to their drag on global growth. “Threatening another prop of the rally, it also appears to be only a matter of time until China acts more forcefully to cool its still excessively hot economy,” it says.

As for the financials, short-term estimates for the sector have remained unchanged. “While a 6% anticipated Q3 advance lags the recent trend, a still-benign yield outlook bodes well for the longer term, with the drag from costlier oil likely to substitute for hundreds of basis points of rate hikes,” it says. “The consensus sees a near-10% rise in the group’s earnings next year. High dividends add, in our opinion, to the financial sector’s general appeal in the present yield-hungry environment.”

The dark lining to this silver cloud is tech, with earnings estimates being slashed to reflect bleaker prospects for both hardware and software. Earnings growth expectations for 2005 have also been shaved by 12%, CIBC reports. “Detracting as well from the overall earnings arithmetic are more cautious prospects for the utilities and consumer staples groups. The consumer staples sector is now expected to post the weakest performance of any sector, with Q3 earnings effectively flat on the year,” it concludes.