TORONTO, May 23 /CNW/ - CIBC (CM: TSX; NYSE) - Earnings among TSX
composite firms appear poised to smash earlier projections with resource
stocks leading the charge, notes a new CIBC World Markets report.
    "A weaker U.S. economy and drag from the financial sector should help
limit TSX earnings growth to a 10 per cent pace in the second quarter.
However, that loss of momentum is likely to prove temporary," says Peter
Buchanan, senior economist and strategist, in the latest TSX Earnings Watch
report. "Traction in the TSX heavily weighted energy and resources sectors,
along with a gradually improving economy stateside should see earnings growth
snap back solidly to a near-30 per cent pace in the second half of the year."
    Mr. Buchanan says upgraded profit expectations suggest that Canadian
equities, particularly recent winners like energy and material stocks, are
likely to remain prime candidates for portfolio exposure over the next 12-18
months.
    "Analysts have been lifting their expectations for earnings growth north
of the border, almost as aggressively as they have been wielding the knife
stateside," adds Mr. Buchanan. "We now expect 2008 TSX earnings to rise by
nearly 21 per cent to an index adjusted 988 in 2008" with a further advance of
around 12 per cent to 1,107 in 2009.
    The projection exceeds 2007's 12 per cent increase and the 10 per cent
rise anticipated at last count for the S&P 500 in 2008. The average annual
rise in TSX profits over the course of the last 25 years is seven percent.
    Mr. Buchanan's forecast also notes that profit margins among TSX
Composite firms "appear to be holding up quite well despite pressure from
sources like the high dollar - better in fact than margins south of the
border."
    The half-decade long rally and the market's current climb may invite
comparisons with the dot.com rally, but Mr. Buchanan cautions against it. "The
gains of (the dot.com) era were driven by 'concept' companies, whose financial
allure far surpassed their ability to deliver. The market's recent run-up has,
in contrast, been earnings-driven. While multiples have risen in step with
stock prices, they are still not at overvalued levels. At just under 16, the
TSX present forward multiple is still slightly on the cheap side, and nearly a
third below its late 1990s' peak.
    "We remain equally dubious of the mantra that recent resource price gains
are largely driven by speculative pressures, and are consequently
unsustainable. The nearly US$4 trillion per year global oil market's vast
size-almost twenty times the value of global commodity index investment - is
of itself an obstacle to market-moving speculation. Inventories for oil and
other commodities are also not ballooning, as might be expected if speculators
were truly keeping prices radically above costs."
    Mr. Buchanan says strong growth ahead is being signaled on several
fronts. These include the following:-   Record highs on the CRB index of commodities indicate that overseas
        economies so far are weathering the housing-centric US slowdown
        better than many observers had expected. This bodes well for the TSX
        which has a nearly 50% resource cap weighting.

    -   China's recent earthquake could lift commodity consumption in coming
        quarters, as the focus shifts to metal-intensive reconstruction.
        Petroleum consumption there should also rise in place of quake idled
        hydro and coal-fired plants.

    -   Each dollar per barrel increase in the price of oil lifts earnings in
        the TSX oil and gas group by some $700-$800 million, or around
        three per cent, allowing for the longstanding correlation between oil
        and natural gas prices.

    -   Rising global fertilizer demand, related to the global food crisis
        has lifted new potash contract prices to the US$1,000 per tonne
        level. Metallurgical coal prices have also risen sharply."Outpacing present consensus expectations, we expect those forces along
with near-record prices for metals like copper to lift earnings in the energy
sector by nearly 60 per cent and those in the mining and chemical dominated
materials group, by over 80 per cent in 2008," says Mr. Buchanan.
    "Earnings in both the TSX energy and materials groups should also surpass
trends stateside in 2008. TSX oil patch earnings are more levered to strong
oil and gas prices, less to unfavourable gasoline margins, than the major US
integrateds. TSX agricultural chemical firms are also less vulnerable to
weaker growth than the S&P 500's heavily weighted stable of industrial
chemical producers."
    He says earnings in the technology sector are also likely to show
resilience, rising by 80% in 2008, although valuations there already price in
a high level of growth.
    The complete CIBC World Markets report is available at:
    http://research.cibcwm.com/economic_public/download/tsxewmay08.pdf

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