Earnings growth will lift the S&P/TSX composite index to the 13,200 level by year end, suggests CIBC World Markets in a new report.

“The TSX has been setting recurrent records recently. An earnings-rich rally, however, means the market is still not particularly expensive, trading at close to 16 times four-quarter forward earnings, which is comfortably within the range of the last 25 years,” the report noted.

CIBC says that the index is up 120% from its late-2002’s low. However, an over 160% rise in earnings over this period has more than matched the run-up in share prices, it points out. “That incorporates our expectation of near-20% earnings growth this year as the TSX profit recovery continues to outpace other G-7 markets,” the report said.

“The TSX’s commodity sectors should remain key earnings spark plugs in Q1,” the report suggested. “Earnings in both the energy and materials sectors are likely to see gains of around 40-50% on the year. That’s a notable improvement on expectations for materials producers three months ago thanks to upgraded prospects for all sub-sectors other than forestry.”

“Calendar 2006 earnings expectations for financial and health care have likewise firmed recently and we expect a similar constructive trend for energy with oil prices once again on fire,” it added.

Apart from energy, it points out that the industrial sector had among the largest profit increases of any sector in 2005. “Earnings there are likely to be up around 25% on the year in Q1, testament to still decent prospects for the rails and the lift to the capital goods sector from rising investment spending, particularly in fast-growing resource areas like the oil sands,” the report said.

Other possible positive factors for stocks include the central banks in the U.S. and Canada ending their rate hiking activity in the next month or two, and expanding profit margins.