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, Barrick Gold and Teck Resources, as well as Canadian National Railway, which generates revenue by hauling commodities.
Overall, analysts are not expecting much. Companies whose shares comprise the blue chip S&P/TSX 60 index 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-capitalisation 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.
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 world-wide.
"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.
The linkage was obvious in May and June when political uncertainty in Greece flared over austerity measures imposed on the debt-strapped country. During that time, the Thomson Reuters-Jefferies CRB Index, a benchmark for commodity prices, was down by nearly a third from the highs of 2011.
With its heavy commodity exposure, the Canadian market has fallen off the pace set by Wall Street this year. The S&P 500 index has risen 8 percent, while the Toronto benchmark index has dropped 3 percent.
The first wave of S&P 500 second-quarter results suggests that Bay Street is unlikely to catch up anytime soon. So far on Wall Street, about 72 percent of the companies reporting have exceeded expectations, according to StarMine data.
In Canada, only 5 percent of companies on the TSX 60 have reported so far, so it's too early to compare. Still, optimism is in short supply north of the border going into the first big week.
Energy is one of the softest spots. Share prices in the sector have fallen nearly 10 percent this year as the price of oil plummeted from a peak above $110 a barrel in the first quarter to under $80 in June. Not surprisingly, energy sector profits are forecast to fall 7.1 percent.
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