First quarter earnings season has begun and the outlook for Canadian stocks is muted, with analysts lowering their first quarter earnings estimates more than average for S&P/TSX Composite companies.
First quarter estimated earnings, on a per share basis, decreased by 8.9% from December 31 to March 31. This decline is far larger than the five-year average of -1.6%, 10-year average (-3.1%), 15-year average (-4.6%), and 20-year average (-3.6%) for a given quarter.
This also represents the largest decline in quarterly earnings per share (EPS) estimates since the second quarter of 2020 (-36.7%). The S&P/TSX Composite is now expected to report a year-over-year decline in earnings of -16.4%. This is a much bigger drop than the -11.7% projection analysts provided on March 31 and the year-over-year earning per share decline of -4.0% on December 31, 2022.
The outlook for the second and third quarter are not looking a lot better. EPS forecasts for the second quarter are -10.2% and -2.9% for the third quarter. Full-year earning for the TSX are projected to fall 5.3%.
The most popular index in the U.S. is the Standard & Poor’s 500 Index, or S&P 500. In Canada, one of the most popular indexes is the S&P/TSX Composite Index.
The S&P 500 is an index of the 500 leading publicly traded U.S. companies that is weighted by market capitalization. That means a larger company will have a bigger influence on how the index performs.
The S&P/TSX Composite Index is also weighted by market cap. It tracks 234 of the largest publicly traded Canadian companies on the Toronto Stock Exchange (TSX). These companies represent approximately 70% of the total market cap of the TSX. For reference sake, there are 1,640 stocks listed on the TSX.
Both the S&P 500 and S&P/TSX are comprised of 11 sectors, but they are weighted differently. In Canada, the three largest sectors are Financials (30%), Energy (16.8%), and Industrials (13.8%).
At the sector level, analysts expect 10 out of the 11 sectors to record a first quarter decline. The biggest losses are projected to come from Energy (-20.9), Materials (-17.6%), and Consumer Discretionary (-16.2%) sectors.
Investors won’t have to wait long to see how accurate analyst predictions are. Over the next four weeks, roughly 200 Canadian companies are expected to report first quarter results. With the TSX trading up 5.6% year-to-date, negative earnings could be pointing to an economic slowdown and rotation out of cyclical stocks to defensive sectors. This could result in some sort of pull-back and create pockets of opportunity.
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