Low expectations for earnings season

Investors are about to turn their attention back to Q1 earnings, which are expected to be the weakest in several quarters.

The trend in the past few months has been towards more downgrades of 12-month forward earnings than increases.

If we backed out technology, earnings growth for the quarter would be negative for the index overall on a quarter-over-quarter basis, with the biggest weakness in telecom, materials, energy and health care. This suggests the TSX will also have a rather poor quarterly earnings period, given the much higher energy and materials exposure. And although most of these Canadian stocks have corrected already, they have not in the U.S.

The one area we just cannot seem to reconcile well is retail stocks. XRT is the ETF representing an equal weight index of U.S. retailers. The chart shows that U.S. retail stocks are 30% above their 2007 peaks, which is hard to reconcile compared to the unemployment picture and massive debt hangover and housing stress.

So with expectations on the low side, that could mean some surprises, but that fact that stocks have been relatively strong heading into the earnings season, the good news is probably already factored in.

Expect volatility to pick up significantly in the coming months with uncertainty levels so high and debt concerns brewing again in Europe.

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