Impending Profit Gloom Has Canada Investors Asking What’s Next

(Bloomberg) -- A deep recession that cost millions of people their jobs. Empty airports, restaurants and hotels. Tens of thousands of people sickened by a virus that ripped through parts of Canada’s largest cities.

That was the story of the second quarter -- an economic and health nightmare because of Covid-19. Starting this week, investors in Canada will get to see the extent of the damage to companies. More than that, they will be watching for clues about earnings power in the future, as cities and provinces try to restart their economies.

Industry bellwethers such as Canadian Pacific Railway Ltd., Suncor Energy Inc., Rogers Communications Inc. and Teck Resources Ltd. report second-quarter earnings this week. For many firms, results will be bad. The important question is how robust are the signs of recovery.

While profit expectations are still at a four-year low, strategists have become more optimistic lately, according to data compiled by Bloomberg.

In the U.S., almost 10% of companies in the S&P 500 have reported results and so far, a majority of them beat analyst expectations on sales and profit, according to data compiled by Bloomberg.

In Canada, three groups make up nearly half of the S&P/TSX Composite Index: banks, miners and energy firms. The latter two sectors report first; banks won’t report again until later in the summer.

Precious metals miners are a bright spot in a seemingly grim period. The flight to havens has boosted the price of gold. “I think that’s a sector that really could benefit from much better than expected earnings -- and investors start to shift their portfolios accordingly and go, ‘Hey, over a longer-term basis, we need to actually be in the sector,’” said Brooke Thackray, an analyst at Horizons ETFs Management (Canada) Inc.

Oil and gas firms were reeling from low prices last quarter, but investors already know that. What matters is the production outlook “because that will determine the earnings potential for the energy sector over the course of the next six to 12 months,” said Philip Petursson, chief investment strategist at Manulife Investment Management.

With uncertainty lingering, Canadian investors should be “very, very selective” when choosing which individual securities they want to own, Petursson said. Companies may not come out with exceptional numbers, but beating forecasts, even by a small amount, can be seen as a win in the second quarter.

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