In this edition of Market Factors, we reiterate the importance of the second derivative of profit growth at a time when global profit growth is declining quickly. Section two covers why one economist thinks the Bank of Canada is on hold for the year and we talk Jeff Bezos’s problematic space program in the diversion.
Equities
Profit outlook dimming fast
The second derivative of growth – the measure of change in the rate of change – is a core concept in investing and one that all investors need to follow. Its importance is unfortunate because the trend in global second-derivative profit growth is now turning decidedly negative and it represents a potential cause of portfolio pain in the weeks ahead.
The second derivative of growth is a vital consideration for stock pickers. A stock that maintains a 20-per-cent annual earnings growth rate, for instance, is likely to underperform a company that goes from an 8-per-cent profit growth rate to 12-per-cent growth. Historically stock prices have been driven by the change in growth rate more than the nominal growth rate.
BofA Securities’ Australia-based quant strategist Nigel Tupper maintains a global earnings revision ratio that tracks changes in profit forecasts across the globe. The ratio, which is simply the number of companies where consensus earnings estimates are rising divided by the number where they’re falling, dropped sharply from 0.98 to 0.76 in April. The number of companies with deteriorating outlooks is now far larger than those with improving forecasts.
Canadian stocks, happily, are bucking the trend. The earnings revision ratio for Canada has climbed from 1.16 in February to 1.39 in March and then 1.64 in April. Canada trails only semiconductor-heavy Taiwan and the Netherlands in terms of one-month change in the three-month average of the revision ratio. This is an obvious outgrowth of the outsized energy sector within Canadian stocks.
Canada, however, is an outlier. The U.S. earnings revision ratio fell from 1.13 to 0.77 in April, European stocks saw a drop from 0.75 to 0.66, and Japanese equities produced a 0.48 drop to 1.15. Emerging markets equities saw their earnings revision ratio drop from 0.85 to 0.70.
The earnings revision ratios for global industry sectors are a disparate set of data. Energy stocks have the best three-month revision ratio average at 1.48 followed by technology hardware (1.46), software (1.19, a bit of a surprise for me) and banks (1.17).
The TSX is in good shape so far but there are signs the oil and gas sector might not be able to carry the benchmark for long. The International Energy Agency recently forecast a 80,000-barrel-per-day decline in oil demand for 2026, the biggest contraction since COVID. High oil prices may be set to cure high oil prices once again.
Signs now point to a re-narrowing of market leadership into technology hardware and other AI-adjacent sectors. Energy, if crude prices stay higher for longer, could also maintain outperformance of the benchmark. This changes if global economic growth reaccelerates and cyclical sectors can play catch-up but they will struggle to do so if energy costs remain high.
Outlook
Bank of Canada on hold for 2026
Bank of America Securities economist Carlos Capistran expects the Bank of Canada to hold policy rates at current levels for the remainder of 2026. Higher energy prices are a risk to both growth (the FIA World Cup could also provide a bigger growth boost than expected, albeit a temporary one) and inflation rates, but overall economic activity remains muted and core inflation actually declined in March.
Options markets reflected expectations for three rate hikes at the beginning of April, which never made sense, and they now indicate only one hike. The Canadian dollar is unlikely to rally as forecasts for rate hikes fade – bond yields will drift lower and become less attractive to global investors – and Mr. Capistran is bearish on the loonie.
The economist believes the U.S. conflict with Iran will facilitate a better trade deal for Canada. The U.S. government will be less likely to antagonize allies as it looks for international support in the wake of Middle East events.
Jeff Bezos at the Italian Tech Week conference in Turin, Italy, in October of 2025.Remo Casilli/Reuters
Diversions
Not easy being Bezos (this month)
I have mixed feelings about Jeff Bezos. I don’t, for the record, think a healthy society produces individuals capable of funding their own space programs but the Americans have two. There are anecdotes about working conditions in Amazon’s warehouses that sound more than a tad sketchy, too.
In one sense Mr. Bezos’s wealth has remained the same at 14 per cent of the total value of Amazon.com. He is a legitimate management genius. The way he structured meetings, organized teams (the “two pizza rule”, single threaded leadership), and organized decision-making, just to name a few examples of innovation, are now widely copied. In 2016, Warren Buffett told students at the University of Maryland that Mr. Bezos is “the best person I have ever seen.” His talent drove the value of his 14-per-cent ownership position into unimaginable wealth.
Mr. Bezos’s space initiatives are not going well recently. The Futurism site might be prone to hyperbole on occasion but their headline “Jeff Bezos’ Botched Space Launch Was So Bad It Could Threaten NASA’s Entire Moon Program” does provide a sense of scale for the disastrous month Mr. Bezos’s space company, Blue Origin, has endured.
On April 19, Blue Origin attempted to situate a satellite for customer AST SpaceMobile into orbit using its most developed, high-powered New Glenn rocket. Blue Origin was forced to dump the high priced equipment into a low orbit that rendered it useless.
The New Glenn rocket was designed to carry Blue Origin’s moon lander as part of the Artemis project. The U.S. Federal Aviation Administration announced it will now embark on an investigation into the failure on the 19th that may take four months and delay the Artemis program.
A lot of journalists are delighting in the failure because they’re mad at Mr. Bezos’s ownership tenure at The Washington Post and they have some solid reasons for that. I try and remember that I like my packages delivered overnight but still, mixed feelings.
The essentials
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The Rundown
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In a lower-yielding environment, preferred shares stand out, writes David Berman.
Quick hits
Is this as good as it gets for oil stocks? I’m not talking about oil companies – they will continue to generate strong cash flow as oil prices remain elevated. The quarter-over-quarter growth rate for profits, however, has likely peaked and stock prices don’t like slowing growth rates. In a quicker way, it might mirror the path of COVID winners like Zoom Interactive. That stock soared as growth rates exploded and then, even though virtual meetings are a much bigger part of business life than before 2020, collapsed when the pandemic ended and the growth rate fell. The International Energy Agency is predicting the biggest oil price decline since the pandemic during the second quarter of 2026 and this is unlikely to help crude stocks.
The U.S. health care system is an abomination, of course, but it might be driving a helpful trend that should spread worldwide. There is a growing initiative towards diagnostic tools to test, screen and monitor conditions before they become more expensive to treat. So far, the trend has been consumer driven through over-the-counter testing devices and wearables.
These tools will be adopted quickly by the health insurance industry because it will reduce the estimated US$1.4-trillion spent annually to treat preventable conditions. For investors, it is early days for this theme but Morgan Stanley analyst Erin Wright expects Life Time Group Holdings Inc. (LTH-N),Planet Fitness (PLNT-N), Cava Group Inc. (CAVA-N) and Quest Diagnostics Inc. (DGX-N) to be among the winners.
If you’re curious as to why I think the U.S. health care system is an atrocity, it’s because health care is not price elastic. When people need important health care, they don’t shop for the cheapest price – they look for the best care. Until consumers are attracted to a strip mall oncologist’s going-out-of-business sale, capitalism can’t account for health care effectively.
Following up on my health care rant, I once met with former presidential candidate Steve Forbes, the flat tax guy, thanks to a mutual fund event I attended. I didn’t agree with much of his platform but he did say one thing that stuck with me. He mentioned that there was only one kind of U.S. health care that hadn’t gone up in price over the previous decade – plastic surgery. The reason was that it wasn’t covered by insurance. I’ve been thinking about this since.