No major stock index in the developed world has done better this year than the S&P/TSX composite, which has risen by nearly 15 per cent.Getty Images/iStockphoto
Corporate Canada is on track to exit the profits recession that has ravaged income statements for nearly two years.
The consensus forecast for third-quarter earnings is for year-over-year profit growth of nearly 5 per cent for companies in the S&P/TSX composite index, according to National Bank Financial.
"This turnaround is welcome and could mean the economy will stabilize in energy-producing provinces," said Matthieu Arseneau, senior economist at National Bank. "Let's hope Canadian corporations will again surprise on the upside this quarter after a pleasant second quarter."
The rebound in energy prices, combined with brutal cost-cutting in the oil patch, are generating an energy-led recovery in Canadian profits, which last saw growth in late 2014.
As a result, no major stock index in the developed world has done better this year than the S&P/TSX composite, which has risen by nearly 15 per cent.
If oil prices hold up, the index should continue to rise through the end of the year.
Another positive is the improving outlook for emerging market economies, which are historically highly correlated with demand for Canadian resources.
Meanwhile, growing divergence between the U.S. and Canadian economies – and monetary policies – suggest the Canadian dollar is headed lower, said Martin Roberge, Canaccord Genuity's head of North American portfolio strategy.
Those forces could result in a relatively rare combination of commodity strength and loonie weakness, Mr. Roberge said.
"This is a nirvana for commodity producers in Canada and for commodity-related earnings.
"That bodes well for TSX earnings."
Together, the energy and materials sectors account for more than one-third of the total market capitalization of the S&P/TSX composite index.
That's not to say all is well in Canadian equities.
Far from it.
In the energy sector in particular, although third-quarter profits are forecast to more than double, it is from a low starting point. In the third quarter last year, the oil crash was still unfolding.
And while crude oil at around $50 a barrel is nearly double this year's low point, it's also still less than half the 2014 precrash peak.
But it's the resource economies that are entirely responsible for the end to profit contraction in Canada. Excluding energy and mining sectors, the remainder of the companies on the index are expected to post an earnings decline of 1.7 per cent.
On the economic front, last Wednesday's rate announcement by the Bank of Canada emphasized growing vulnerabilities in the domestic economy. The bank again cut its growth forecast, as well as its expectations for inflation, and even openly contemplated additional stimulus, presumably through a rate cut.
Such action would typically put downward pressure on the Canadian dollar, which in turn would make Canadian exports more attractive to foreign buyers. And if emerging market economies are on the upswing, those two forces could prove a powerful combination for resource exporters.
"The outlook going forward is extremely positive for our commodity prices," Mr. Roberge said. "In Canadian dollar terms, everything is going to get better."
And so, with all the caveats on this earnings season, profit growth is profit growth, Mr. Roberge said.
Shrinking profits have formed a key facet of the average bear case over the last couple of years. And declining earnings have added to fears of overvaluation by putting upward pressure on price-to-earnings ratios.
Meanwhile, the U.S. market is staging a recovery of its own, as the longest profit recession since the global financial crisis appears to be coming to an end.