(Bloomberg) -- Slowing global growth and the threat of a drawn-out trade war between the two largest economies have impacted corporate profits across the world. Not so in Canada, where equity bulls have boosted their earnings expectations to a record high.
Strategists are expecting profits for companies listed on the benchmark S&P/TSX Composite Index to climb to C$1,143 ($864) a share for 2019 thanks to the nation’s expanding economy, stronger commodity prices and a solid earnings season that’s currently underway.
And even as yield curves invert in Canada, the U.S. and the U.K. -- triggering yet another global recession warning -- profit forecasts on Canada’s benchmark index have risen at a faster pace than that of a gauge of developed-market equities.
“The difference starts with the macro picture,” Samantha Azzarello, global market strategist for JPMorgan (NYSE:JPM) ETFs, said in a phone interview. “Strength in the underlying economy, which even took the Bank of Canada by surprise, is feeding into the profit and sales outlook for Canadian companies.”
In the U.S., companies have slashed their forecasts at the fastest rate in four years, according to data compiled by Bloomberg. The overall macro growth is slowing and that concern has been feeding into analysts’ expectations for U.S. earnings, Azzarello said. “You contrast that with Canada, GDP growth is actually stronger than most people thought.”
Companies listed on Canada’s benchmark index have beat estimates by about 6% on average, the most in a year. More than 80% of S&P/TSX companies have reported results, according to Bloomberg data. And about two-thirds of those firms have posted profits that beat estimates, including pipeline operator Enbridge Inc. and mortgage lender Home Capital Group Inc.
Business executives in Canada were also positive in the second quarter on the outlook for future sales despite concern about global trade headwinds, according to the latest bank of Canada survey. The composite gauge of sentiment turned positive, after dropping to its lowest since 2016 earlier this year.
Guidance provided by Canadian companies has been “relatively good,” said Bruce Campbell, founder of StoneCastle Investment Management Inc. “If you look on aggregate, they all seem to think that things are going to be fairly good. That’s a function of the economy.”
The Risks
There’s still some uncertainty that could hinder the growth in profits. While most Canadian companies may not be directly impacted by the U.S.-China trade war, a slowdown in the economic growth south of the border will hit corporations up north.
“The U.S. is still our largest trading partner. If they slow down, so does Canada,” said Laura Lau, senior portfolio manager at Brompton Corp. “We supply many U.S. companies in the supply chain.”
The slump in oil prices will also impact earnings. “The decline in oil prices is definitely going to weigh on profitability in the energy sector. And energy is still the second-largest sector whether you’re looking at the TSX or MSCI Canada,” Azzarello said.
There’s also the revised North American Free Trade Agreement, or USMCA, that still needs approval from Congress. “That’s a huge risk,” Azzarello said. “No one’s talking about it just because we’re all so focused on U.S.-China trade and so is the U.S. but that’s going to be on the docket at some point,” she added.
Canadian banks have yet to report earnings. Financials are the largest contributors to the S&P/TSX, with a 31% weighting. “We do not expect Q3 results to resolve the conflict between the pessimism and optimism surrounding the macroeconomic environment,” said CIBC analyst Robert Sedran in an Aug. 12 report. “We do expect to see growth,” of about 6% for the banks. “The best of a lacklustre year so far,” he noted.
Royal Bank of Canada is the first to report results on Aug. 21 and CIBC comes out the following day. The rest of the Big Six report the week of Aug. 26.
Still, strategists expect Canadian stocks to keep climbing, albeit at a slower pace than the first half of the year. The equity gauge has gained 14% so far in 2019. JPMorgan sees low-to-mid-single digit returns in the second half, while StoneCastle’s Campbell sees a further climb from current levels while bracing for more volatility.
(Updates story to include yield curve inversions in the U.S. and U.K. in third paragraph.)