Slower profit growth is in the cards for Canada's biggest companies this year, as Europe's downturn dims the outlook but mounting U.S. economic strength provides support.
The quarterly reporting period for the country's blue chip corporations swings into high gear this week, with Canadian Pacific Railway and fertilizer company Potash Corp among those releasing results.
Companies whose shares comprise the blue-chip S&P/TSX 60 index are expected to report average quarterly earnings growth of 3% from a year earlier, according to Thomson Reuters StarMine SmartEstimates.
That's a far cry from the forecast for earnings growth for companies on the U.S. Standard & Poor's 500, a much broader index, which StarMine puts at 23%.
"The tug of war is between the bad news out of Europe and the good news from North American companies and the North American economy," said Kate Warne, Canadian market strategist at Edward Jones.
"We expect to see more of it this year - worries about Europe balanced and really offsetting the fact that companies continue to do well."
The S&P/TSX 60 is seen doing better as the year goes on, with 2012 earnings growth expected to come in at 11.5%. S&P 500 earnings increases are seen at 10.3% for 2012.
Still profit growth at big Canadian companies would be well below the estimated 16.4% rate of 2011.
"Economic growth will be slower this year. We've got a recession in Europe. China has slowed," said George Vasic, equity strategist and chief economist for UBS Securities Canada.
Reuters polls of some 600 economists shows the world economy will lose momentum in 2012 as crisis-hit Europe acts as a drag on global growth.
Canada won't be immune to the slowdown and is set to underperform the U.S. for the first time in seven years. .
Within the broader benchmark composite, Vasic says he favors the energy sector because shares have generally lagged a rebound in oil prices. Financials are attractive as they have desirable dividend yields.
Quarterly profit growth for energy and materials companies in the blue-chip index is expected to be 21.9% and 46.5% respectively.
The information technology sector, dominated by struggling BlackBerry maker Research In Motion, financials and utilities are all expected to lag the broader market, according to StarMine data.
Fears about the euro zone region will remain the key wild card for earnings outlooks, market strategists say, culminating in March when 14.5 billion euros of bond redemptions fall due for Greece.
Signals from the region have been mixed.
Credit rating agency Standard & Poor's recently slapped a raft of downgrades on euro zone countries, including France and Italy. But European economic data and debt sales in recent weeks suggest the economy may be stabilizing and investors becoming less nervous about the ability of governments to refinance debt.
"It's Europe. All bets are off if one of those countries defaults and there's no orderly default to it." said Barry Schwartz, a portfolio manager at Baskin Financial Services.
Yet signals of strength can be seen in relatively upbeat U.S. data including consumer sentiment and manufacturing. The United States remains the destination for the majority of Canadian exports.
From the United States, earnings from financial names such as Bank of America and Morgan Stanley have also set a generally supportive tone.
"If the strength we've seen in the U.S. emerging over the last couple of months continues given how important it is in Canada then you might see more optimism starting to come through in comments that companies make when they're announcing slower growth," said Gavin Graham, president of Graham Investment Strategy.
"We might be pleasantly surprised even though there's the worry about Europe."
(Additional reporting By Jon Cook; Editing by Jeffrey Hodgson and Janet Guttsman)