TSX faces tough results season; global slowdown bites

Sun Jul 22, 2012 12:18pm EDT
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By Jennifer Kwan and Jon Cook

TORONTO (Reuters) - Canada's stock market has lagged Wall Street most of the year, and investors can expect more of the same as the country's biggest companies start reporting second-quarter financial results next week.

The earnings season is sure to highlight the scenario that has held Canadian stocks down for months. A limp economic outlook is pulling down commodity prices and cutting into profits at the energy and mining companies that dominate the country's equity markets.

Next week will bring reports from such resource heavyweights as Suncor Energy (SU.TO: Quote), Barrick Gold (ABX.TO: Quote) and Teck Resources TCKb.TO, as well as Canadian National Railway (CNR.TO: Quote), which generates revenue by hauling commodities.

Overall, analysts are not expecting much. Companies whose shares comprise the blue-chip S&P/TSX 60 index .TSE60 will report an average quarterly earnings decline of 0.2 percent from a year earlier, according to Thomson Reuters StarMine SmartEstimates. This compares with the earnings growth of 0.7 percent that StarMine had forecast ahead of first-quarter results.

"It doesn't take a genius to know that oil was $100 in the first quarter and it was $85 in the second quarter, so it's not going to be as good," said Barry Schwartz, portfolio manager at Baskin Financial Services. "The market knows that the commodity names are going to be lousy."

For better or worse, the Canadian market often marches in lock step with commodity prices. That's not surprising given the plethora of energy and mining companies trading on the Toronto Stock Exchange or the small-capitalization TSX Venture Exchange. Indeed, resources account for more than 40 percent of the value of the Toronto exchange's benchmark S&P/TSX composite index .GSPTSE.

Commodity prices have weakened along with the growth outlook for major economies such as United States and China, while Europe's debt crisis dims the outlook worldwide.

"It's a zero to low-growth environment. It'll be a very, very rough patch for Canadian earnings," said Kien Lim, associate equity strategist at RBC Capital Markets.   Continued...

A Toronto Stock Exchange (TSX) logo is seen in Toronto November 9, 2007. REUTERS/Mark Blinch