UBS Securities Canada Inc. says that it now expects TSX earnings to rebound by 40% next year, on higher commodity prices.

The firm raised its oil price forecast. The UBS energy team is now expecting oil to average US$58.25 this year, up from its previous forecast of US$51, and it sees oil at US$70 next year, up from US$58, it said in a research report.

It also revised its forecast for various metals prices, concluding the “net result of all these changes is that estimated TSX earnings drop 26% this year, and then rise a sizeable 40% in 2010.” It previously expected earnings to drop 26% this year, and rebound 29% in 2010.

The biggest rebound is expected for the materials sector, where it sees earnings falling 31% this year, but jumping by more than 100% next year. Energy sector earnings are forecast to drop 54% this year, before bouncing back 57% next year.

It sees positive earnings growth this year in utilities, health care, technology and telecoms. The forecast for financial sector earnings is unchanged — expected to drop 2% this year, and rise 23% next year.

Looking at valuation, the firm notes that the TSX currently trades at 16.6 times its 2009 estimate and 11.9x its 2010 estimate. “While the former seems high, it is on (what we hope) is close to trough earnings, and significantly lower than the valuation at the trough of the 2002 and 1991 cycles, which were more than 20x and 30x trailing earnings, respectively,” it says.

IE