Another stellar quarter of profit growth from Canada's biggest companies may do little to boost its stock market, with investors focused firmly on worrying global debt crises.
Canada's second-quarter earnings season kicks off in force this week, with a recovery at insurer Manulife Financial (MFC.TO: Quote) and rising commodity prices expected to help generate double-digit profit gains for blue-chip companies on average.
Even so, a favorable wave of corporate results may not wash with investors faced with Europe's lingering sovereign debt crisis and a U.S. political showdown that could lead to the country defaulting on its debt.
"As crazy as it sounds, people have become so infatuated with the whole concept of macro," said Sid Mokhtari, market technician at CIBC World Markets.
"There was a point where people would be looking at companies from a bottom-up perspective and the fundamentals of that company. But now, it's all about 'let's see what Greece is all about, what Italy's all about'."
Blue-chip companies on the Toronto Stock Exchange's S&P/TSX 60 index are expected to report eye-popping second-quarter earnings growth of 32.6 percent from a year earlier, according to Thomson Reuters StarMine SmartEstimates.
By comparison, second-quarter earnings for companies on the U.S. Standard & Poor's 500 .SPX, a much broader index, are seen rising 6.5 percent, according to Thomson Reuters Proprietary Research.
To be fair though, Canada's superior performance reflects the influence of just a few companies, particularly Manulife. The biggest Canadian life insurer reported a steep quarterly loss a year ago when it was hit by sharp declines in equity markets and bond yields.
Profits at Canadian financial blue chips are expected to surge 122.6 percent in the quarter, mostly due to Manulife's snapback. The insurer is expected to reverse its C$1.36 a share loss in the year-before quarter with earnings of C$0.23 a share, according to StarMine SmartEstimates.
The index's financial sector is also home to the country's solidly profitable lenders, including Royal Bank of Canada (RY.TO: Quote) and Toronto-Dominion Bank (TD.TO: Quote).
The heavily weighted materials sector -- which includes Barrick Gold (ABX.TO: Quote) and Potash Corp of Saskatchewan (POT.TO: Quote) -- is also a major profit locomotive, with earnings expected to rise 36.3 percent.
Still, the improved results may do little for the performance of the blue chip S&P/TSX 60 or the broader Toronto Stock Exchange's S&P/TSX composite index .GSPTSE. The composite closed up 60.33 points, or 0.45 percent, at 13,494.63 on Friday, its highest closing level since June 6.
"Is this quarter going to be earnings-driven one way or another? The answer's 'no'," said BMO analyst Paul Taylor. He says the macro backdrop of the euro zone debt crisis and the U.S. budget negotiations will dominate for now.
"We get by those two, then the market will focus on earnings. But there are bigger clouds on the horizon than earnings."
Investors on Friday were digesting details of a new aid deal for Greece and trying to gauge whether it is enough to stop the euro zone debt crisis from turning into a global one.
They were also turning their attention to the struggle in Washington over raising the U.S. debt ceiling, with less than two weeks left to avert a default.
LONGING FOR A RETURN TO FUNDAMENTALS
In fact, the TSX is currently up less than 1 percent from the end of 2010. A Reuters poll conducted last month showed analysts expect the index to end 2011 at 13,775 for a gain of 2.5 percent this year.
That pales before stock market gains of nearly 31 percent in 2009 and 14.4 percent last year.
The U.S. second-quarter earnings season, already well under way, holds some valuable lessons for Canada, analysts say. Estimate-topping results at many S&P 500 companies have in many cases failed to spark overall market gains.
Investors are eager to see corporate results have a greater influence on the direction of Toronto's main stock market once again, while mindful that the sovereign credit issues could keep an iron grip on investor psychology for a long while yet.
One element of the earnings season that market players do seem keen on is forecasts. Analysts said investors will listen closely for more optimistic signals from corporate executives and hope to hear that revenues and cash flow are expected to grow, after several quarters of corporate focus on cost cuts.
"You can simply get better earnings by cutting jobs or lowering your costs, but at some point that game is getting old and you have to find growth," said Marcus Xu of Genus Capital Management in Vancouver.