BAY STREET-Modest Canada earnings may not impress wary market

* Second-quarter Canada earnings growth likely modest

* Investors expect tepid response to results

* Macro backdrop will weigh

By Claire Sibonney

TORONTO, July 13 (Reuters) - Canada's biggest companies are expected to deliver only modest earnings growth for the second quarter, and that's probably not enough to lift the spirits of investors as they obsess about an uncertain global economy.

Most Canadian companies will report their quarterly results during the next two or three weeks. The timing is less than ideal, with the market focused on Europe's debt crisis, slowing Chinese growth and the threat of a double-dip recession.

Given those concerns, it will take a combination of robust results and a healthier global outlook to repair fractured sentiment, analysts said.

"If you have a combination of earnings looking pretty good for the second quarter and what lies ahead being solid ... with some reduced anxiety about that macro-environment, I think that's what will drive the market higher," said Bob Gorman, chief portfolio strategist at TD Waterhouse.

"I don't think the earnings in themselves will be the catalyst."

Companies in the Toronto Stock Exchange's blue-chip S&P/TSX 60 index .TSE60 are expected to average 2 percent gains in second-quarter earnings per share compared with last year, according to Thomson Reuters StarMine SmartEstimates. The index is trading at about 10 times 12-month forward earnings.

But for the broader S&P/TSX composite index .GSPTSE expectations have been revised down to show a decline of 1.9 percent in the same period, according to RBC Capital Markets.

The index dropped just under 10 percent from its high of the year in April to its low point in early July. It closed at 11,570.45 on Friday, rising for a fourth straight session. [ID:nN09257493]

"Current levels of oil and copper and most commodity prices are not conducive to major increases in earnings heading into 2011, so that's the cloud right now for TSX earnings," said Vincent Delisle, an equity strategist at Scotia Capital.

Among heavyweight companies reporting over the next few weeks are Teck Resources (TCKb.TO), Suncor Energy (SU.TO), Barrick Gold Corp (ABX.TO) and Potash Corp (POT.TO).

Cyclical resource plays like energy and mining stocks have a high weighting on the Toronto market, making it more vulnerable if the global economy stumbles back into recession.

"We're all wondering if we're at this inflection point where growth is going to stall," said Paul Taylor, chief investment officer at BMO Investment Management.

Taylor said he's "moderately optimistic" on the outlook for the TSX, even given the global backdrop.

"Any sign or any visibility that in fact we're going to get a sustainability of economic growth and of corporate earnings growth is going to be critically important," he said.

U.S. COULD BOOST SENTIMENT

Scotia's Delisle said U.S. earnings, closely watched by investors globally, actually hold a stronger chance of helping the Canadian market rise. Higher profits there could boost global investors confidence, with the resulting buying spilling over into the TSX.

"There is a strong likelihood that the numbers we see coming from the U.S. not only beat expectations but probably reduce the gloomy double-dip mentality we have right now in the market and we could get back closer to 12,000 on the S&P/TSX," he said.

Analysts said that while Canada's earnings season is unlikely to inspire, there is also little in the way of downside risk, given that last year's numbers offer easy comparisons.

"The second quarter of last year was the nadir of the recession ... that was effectively when the recession ended but it was also when earnings were at their lowest; people were cutting expenses, you had low volumes and things like that," said Gavin Graham, global strategist at Excel Funds Management.

Graham sees Canadian companies meeting forecasts, but doesn't expect investors to get overly enthusiastic about the TSX as much as the S&P 500.

Barry Schwartz, a portfolio manager at Baskin Financial Services, said he was bullish about the outlook for the market given that expectations are not as high as they were in the first quarter.

"The bar is set lower. The market has spoken with its feet and sold off," he said.

"There are a lot of doom-and-gloomer guys out there that are scaring investors, but the fact of the matter is dividend yields are much more attractive than bond yields and stock prices haven't been this attractive since the March bottom." (Editing by Jeffrey Hodgson, Frank McGurty and Rob Wilson)