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(Reuters)
By Scott Anderson
TORONTO (Reuters) - Strong results from some of Canada's key companies could take a back seat to ongoing turmoil in financial markets as the second-quarter reporting season gets under way.
Commodity-based companies -- oil and gas, agriculture and mining -- are expected to fare reasonably well this reporting season, but those connected with the Toronto Stock Exchange's heavily weighted financial sector are likely to experience a rougher ride.
"The way the market is reacting right now, I don't think people are as concerned about earnings as they are about the health of financial institutions," said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier.
"Earnings will be overshadowed by what is going on in the financial services area. But having said that, it's going to be asymmetrical. Companies that meet or beat their earnings (forecasts) may just stay still, while companies that miss will probably be severely punished."
That was evident earlier this week when Nexen Inc dropped 11 percent after its quarterly numbers didn't live up to analysts' lofty expectations.
Some Canadian banks are struggling to shrug off the fallout from the U.S. mortgage-inspired credit crunch, with Canadian Imperial Bank of Commerce and Royal Bank of Canada , in particular, expected to report sizable writedowns.
"The ripple effects from the financials into the real economy are beginning to be felt," said Michael Sprung, president at Sprung and Co Investment Counsel.
Financial institutions, which account for about 30 percent of the Toronto market's main index, are expected to deliver mixed results -- ranging from low single-digit profit increases to low double-digit increases.
The Toronto Stock Exchange's S&P/TSX composite index , which closed up 55.71 points, or 0.41 percent, at 13,515.96 on Friday, posted a paltry 1 percent gain in the second quarter as the effects of the downturn among financials lingered.
High-flying materials and energy companies may be able to take the market's mind off the banks.
"The widening disparity between expected TSX resource and nonresource earnings growth raises new concerns, despite the decent profit picture for the composite as a whole," a CIBC World Markets report said.
The CIBC analysts expect gains of 47 percent in energy earnings and 40 percent in the materials sector, lifting total resource company earnings by 45 percent.
CIBC expects earnings of about 16 percent for the index as a whole.
Fertilizer producers Agrium Inc and Potash Corp of Saskatchewan are riding a huge wave of demand, while energy firms have benefited from record oil prices, which averaged more than $123 a barrel in the quarter, 90 percent higher than in the second quarter of last year.
"How can you not have very good earnings when oil is close to an all-time high and natural gas is rebounding significantly?" Nakamoto said.
And the market, as always, will be looking ahead.
"What everybody is looking for now is the outlook," said John Kinsey, a portfolio manager at Caldwell Securities. "What did they see going forward and is it good or is it bad? I think everybody, so far, has been cautious for the future and so they should be because they are a lot of pitfalls out there."
($1=$1.00 Canadian)
(Reporting by Scott Anderson; Editing by Peter Galloway)
