Earnings among firms making up the S&P/TSX composite index firms appear poised to smash earlier projections with resource stocks leading the charge, according to a report released today by CIBC World Markets.

“A weaker U.S. economy and drag from the financial sector should help limit TSX earnings growth to a 10% pace in the second quarter. However, that loss of momentum is likely to prove temporary,” says Peter Buchanan, senior economist and strategist. “Traction in the TSX heavily weighted energy and resources sectors, along with a gradually improving economy stateside should see earnings growth snap back solidly to a near-30% pace in the second half of the year.”

Buchanan says upgraded profit expectations suggest that Canadian equities, particularly recent winners like energy and material stocks, are likely to remain prime candidates for portfolio exposure over the next 12-18 months.

“Analysts have been lifting their expectations for earnings growth north of the border, almost as aggressively as they have been wielding the knife stateside,” adds Mr. Buchanan. “We now expect 2008 TSX earnings to rise by nearly 21% to an index adjusted 988 in 2008” with a further advance of around 12% to 1,107 in 2009.

The projection exceeds 2007’s 12% increase and the 10% rise anticipated at last count for the S&P 500 in 2008. The average annual rise in TSX profits over the course of the last 25 years is 7%.


Buchanan says strong growth ahead is being signaled on several fronts.

Record highs on the CRB index of commodities indicate that overseas economies so far are weathering the housing-centric US slowdown better than many observers had expected. This bodes well for the TSX which has a nearly 50% resource cap weighting.

China’s recent earthquake could lift commodity consumption in coming quarters, as the focus shifts to metal-intensive reconstruction. Petroleum consumption there should also rise in place of quake idled hydro and coal-fired plants.

Each dollar per barrel increase in the price of oil lifts earnings in the TSX oil and gas group by some $700-$800 million, or around 3%, allowing for the longstanding correlation between oil and natural gas prices.

Rising global fertilizer demand, related to the global food crisis has lifted new potash contract prices to the US$1,000 per tonne level. Metallurgical coal prices have also risen sharply.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/tsxewmay08.pdf