Canada's biggest companies should deliver impressive earnings growth over last year's dismal first quarter, but that may not be enough to lift a market that's already near its highest level in nearly two years.

Getting more than a muted response on Toronto's main stock index will require a cheerful outlook for 2010 and proof that companies are actually generating higher revenues, rather than relying on tough cost-cutting to bolster their bottom lines, analysts said.

Many companies in the Toronto Stock Exchange's blue-chip S&P/TSX 60 index <.TSE60> are expected to report double-digit gains in first-quarter earnings per share.

The big question for the stock market is, are they going to be strong enough, said Martin Hubbes, chief investment officer at AGF Investments, which had C$44.9 billion ($44.5 billion) in assets under management at the end of March.

We've had a pretty tremendous run in the market and I think that's reflected in the pricing.

Since bottoming in March 2009, the large-cap S&P/TSX 60 has risen almost 57 percent as of Friday's close, while the broader S&P/TSX composite index <.GSPTSE> was up 61 percent.

Hubbes also pointed to whisper numbers that some companies will have to beat in order to move markets, reminiscent, he said, of the 1999 technology boom, in which published analyst expectations became obsolete.

Investors say any room for an upside in stock prices will rely on signs of a strong outlook.

We need good guidance, particularly from the industry leaders. You need the banks to stay positive, you need the resource companies to deliver good earnings but also to talk positively about demand for their commodities, particularly out of China, added Hubbes.

Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier, echoed the sentiment, warning that pessimistic guidance could easily take down stock prices. Still, he thinks quarterly earnings should show good gains.

We're going to see revenue increases and tight costs and that translates pretty quickly to the bottom line for earnings growth, he said.

Youssef Zohny, associate portfolio manager at Van Arbor Asset Management in Vancouver, said the broader market is unlikely to rise further on improved results so he is searching carefully for those few undervalued sectors and companies with the potential for price gains.

We've seen a lot of economic data pointing to an economic and profit recovery but what I'm really looking for is top-line sales growth. That's going to really solidify and justify the recent run-up in stock prices, he said.


Among heavyweight Canadian companies reporting results over the next 10 days are Teck Resources , EnCana Corp , Barrick Gold Corp and Potash Corp .

Aluminum giant Alcoa Inc kicked off the U.S. first-quarter earnings season last week with revenue that missed Wall Street estimates, despite higher prices, which pushed down its stock and put a question mark over results for the resource sectors.

Earnings are probably going to be higher because commodity prices have improved, but we're not expecting huge increases in profits, similar to banks or financials, which will show huge increases year over year, said Barry Schwartz, a portfolio manager at Baskin Financial Services.

Schwartz said the problem for heavyweight oil and gold companies will include disappointments in production and higher input costs.

Many investors are betting financials, on the other hand, will outperform.

Banks, you can argue, are firing on most cylinders here. Loan losses are coming down, loan growth because of the economy is moving up. Capital markets have also been very friendly to them in terms of IPOs and that so I think the banks are going to do quite well here, said Nakamoto.

Insurance companies such as Manulife Financial will also be watched closely.

Earnings have been somewhat disappointing until recently and the management team has built up capital and taken reserves, and I think market people will be looking for that trend coming to an end, said Hubbes. We own quite a bit of Manulife.

Schwartz is also upbeat about the insurer.

They've taken all their hits and all their lumps and they have a lot of exposure to rising stock markets, he said.

Investors should not put too much stock in results from the first half of the year, he added, since comparisons are against a time when both the markets and the broader economy bottomed out.

These numbers are baked in. ... What's going to happen once interest rates go higher? What's going to happen once the stimulus packages are taken off? What's going to happen when taxes go higher? What happens to the stock market then? It can only go higher if earnings continue to be improved year over year, said Schwartz.

(Editing by Jeffrey Hodgson and Rob Wilson)