TORONTO Financial results from Canada's biggest companies are likely to disappoint investors in the coming weeks with weak global growth and mixed commodity prices expected to have pummeled the quarterly earnings of oil companies and miners.
Energy and materials shares make up about half of the value of the Toronto Stock Exchange's benchmark S&P/TSX composite index and include such blue chips as Suncor Energy Inc, Teck Resources Ltd and Goldcorp Inc.
All three companies are expected to post year-on-year drops in fourth-quarter earnings per share when they report in February.
Overall, companies in the TSX are expected to report quarterly earnings growth of only 0.3 percent from a year earlier, according to Thomson Reuters StarMine SmartEstimates. Analysts see full-year 2012 earnings dropping 1.4 percent, but they expect profits to climb around 9 percent next year.
"This earnings season might be a mild disappointment in some cases, or a mild disappointment overall," said George Vasic, chief economist and strategist at UBS Securities Canada.
Vasic noted that TSX valuations are higher than they were last year, increasing the risk that stock prices could fall on negative news. He said investors will be especially sensitive to earnings outlooks, and that capital spending plans will be scrutinized.
In the United States, where the fourth-quarter earnings season is already well underway, shares of such top financials as Bank of America and Citigroup have fallen on disappointing results.
By the time reporting is done, S&P 500 fourth-quarter earnings are expected to have increased just 2.5 percent, according to Thomson Reuters data, but that is still far better than what is expected from TSX companies.
Philip Petursson, a managing director of the portfolio advisory group at Manulife Asset Management, said the market has already priced some negative news into Canadian share prices.
Even so, he said, "you can have a couple of shocks that will take things a little bit lower".
TSX TO LAG S&P 500 ONCE AGAIN?
With the global economy struggling because of political gridlock in Washington, Europe's debt crisis, and a slowdown in Asia toward the end of last year, it's little wonder that growth-sensitive sectors such as energy and materials were the worst performers on the Canadian market in 2012.
Toronto's S&P/TSX composite put in a much weaker performance last year than the more-diversified S&P 500 index. The TSX was up 4 percent in 2012, while the S&P gained 13.4 percent.
Many analysts see the trend extending into 2013. The TSX is expected to rise about 4.5 percent in 2013, while the S&P is seen doubling that at 9 percent, according to Reuters polls.
Global economic weakness has translated into weak commodity prices, particularly for energy. As a result, oil and gas producers are expected to show an earnings decline of 18 percent in the fourth quarter, according to Thomson Reuters data.
But Canadian-specific issues are hitting domestic producers as well. With limited capacity to move Canadian crude oil abroad, crude pumped out of Alberta and other provinces sells at a steep discount to international prices, especially for heavier grades.
"Commodity prices and oil we think are going to be more flat over the next year or so and that's going to be a tremendous headwind for the energy sector," said Shailesh Kshatriya, senior investment analyst at Russell Investments Canada.
MINERS DRAG, FINANCIALS UNDERWHELM
The TSX index's materials sector, home to miners of potash and industrial and precious metals, is expected to have had profit growth of just 1.3 percent in the fourth quarter.
But commodity prices are not entirely to blame for this. The price of spot gold, which traded around $1,686.10 an ounce on Friday, is up from a year earlier. Yet shares of Canadian precious metal miners lost 16 percent last year.
"As these companies find more gold, it's getting more and more costly to pull it out and get it out of the ground," said Allan Small, senior investment adviser at DundeeWealth, noting that a similar problem for oil companies has caused their stocks to lag the commodity prices.
Even shares of Canada's still-healthy banks, which don't start reporting results until late February, could start to lag after performing relatively well since the 2008-09 global recession.
"We're looking for low single-digit kind of gains for the reasons that pretty much everybody knows - the slowdown in the housing market and then the mortgages," said John Kinsey, portfolio manager at Caldwell Securities.
Analysts expect banks' loan losses could increase because Canadian household debt is near record highs.
"The saving grace I guess is the dividends," he added. All of Canada's six biggest banks trade with dividend yields of more than 3 percent, a level that is expected to support their stock prices even if the earnings outlook darkens.
(Editing by Jeffrey Hodgson; and Peter Galloway)