Canadian firms may be challenged to deliver on profit expectations, warns National Bank Financial.

“As the profit season is set to begin in Canada, earnings news from south of the border is not providing investors any comfort whatsoever,” it says in a research note. “At this writing, third-quarter S&P 500 operating earnings are estimated to be down 3% from a year earlier. If that projection holds up, it will be the first year-over-year contraction of S&P 500 quarterly earnings since the fourth quarter of 2001, when the U.S. economy was just pulling out of recession.”

Yet, even with these “modest” expectations, U.S. companies can’t seem to deliver what analysts expected them to, NBF says. “Since October 1st, about a quarter of the S&P 500 companies have reported their Q3 results. On average, operating earnings for those companies came in 9.2% below expectations (for an average Q3 earnings decline of 5.2%),” it reports.

Notwithstanding these disappointments, NBF says that analysts seem to think that third quarter will prove to have been nothing more than a speed bump. They expect operating earnings growth to return to double digits as early as the fourth quarter, it says. However, it warns that if companies continue to under deliver, “profit disappointment could set the table for important downward revisions.”

“And considering that Q3 earnings growth expectations are a lot rosier in Canada (+11%), the downside risk is ever greater this side of the border, especially given the recent [Canadian dollar] appreciation,” it concludes. “We estimate that a 10-cent rise of the Canadian dollar squeezes earnings about 6%, other factors being equal.”