Analysts Bearish on TSX Earnings Growth in 2009

Consensus estimates suggest earnings for the S&P/TSX composite index will decline 7.5% in 2009, the lowest level of annual growth in history, and things might still get worse. Analysts have several quarters to pare down their earnings targets further as the impact of the weakening global economic environment weighs further of corporate profits in Canada, according to RBC Capital Markets quantitative analyst Chad McAlpine. As a result, RBC is forecasting an 11.6% drop and expects most the revisions will come in the form of downgrades.

Index earnings are not only at a historic high but they are approaching a major peak – a bearish sign for earnings growth, as forecasts only approach negative territory near major cyclical earnings peaks, he noted.

The analyst warned:

When 12-month earnings growth expectations have reached their lowest levels during past major earnings cycles, two years of poor market performance has followed.

However, each of these two-year windows had a four to six-month rally in the first year before the market dropped to a pre-recovery low. So opportunities exist for those who are successful at timing the market.

Despite this gloomy outlook, there are some sectors with positive 12-month forecast earnings growth and fewer negative revisions to their consensus estimates than the broader index. These include health care, consumer staples, industrials and utilities.

Mr. McAlpine told clients:

Energy and financials have both negative projected earnings growth rates and a higher breadth of downward versus upward estimate revisions than the composite index on a weighted basis.

The expected decline in energy sector earnings during the next year is the primary culprit behind the historic low in forecast earnings growth. In fact, the outlook is so negative that all of the other nine sectors in the TSX composite have higher earnings growth expectations than the index itself, the analyst noted.