Corporate earnings growth may slow faster than many expect in 2004, according to the latest Quarterly Earnings Report from CIBC World Markets Inc.

The report notes that Toronto-listed companies saw fourth quarter profits bolstered by gains in the services group, low yields and rising U.S. demand. “A 26% rise on the comparable 2002 quarter lifted earnings for the whole of the year by 37%, which surpasses the previous cycle’s earnings peak, set back in 2000,” it says. “The financial and telecom groups, with near-40% year-on-year profitability gains in Q4, were again notable winners.” For the full year, Toronto outperformed New York, it reports.

Materials stocks were boosted by higher commodity prices, but much of that gain may be over, it says. “Given that post-WWII commodity price rallies have lasted an average 31 months, the present 29-month-old upswing is in at least the 7th or 8th inning,” it cautions.

For 2004, CIBC predicts TSX earnings will rise by a more modest 15%. “That figure — which implies a forward PE of 17.6,somewhat above longer-term trends — tops our earlier estimate but trails the consensus’ well–over 20% growth prediction. We think, however, that the consensus’ upbeat assessment underweights some critical risks to the outlook.” The risks include the strong dollar, and prospective slackening in U.S. growth due to high fiscal deficits.

CIBC says that its analysis of the critical drivers of earnings momentum shows that profit margins for large TSX firms have rebounded from the depths reached during North America’s recent slump. “While aggressive cost cutting in technology accounts for about 40% of that improvement, margins even leaving out IT are up an appreciable 300 bps from their lows.”

However, it warns that weak revenue growth could hamper further profit gains. “If there is an Achilles’ heel to the earnings upturn, it’s the lack of top line firepower,” it says.

“Profit growth, looking ahead, will likely slow faster than many observers expect, given hurdles like the still-high Canadian dollar and cooling US growth, and because comparisons from the higher, year-earlier levels will get more difficult,” it says.

However, the reports sees room for dividends to grow at a faster pace than earnings. “Earnings in the utilities sector in particular could easily support another 10% rise in dividends,” CIBC concludes.