In this photo provided by the New York Stock Exchange, traders work on the floor on April 21, 2021.Courtney Crow/The Associated Press
Corporate Canada is about to get on the phone for a much-needed wellness check.
How big businesses are meeting this moment of tariffs and turmoil is one of the great unknowns facing Canadian investors.
Quarterly earnings season, which gets going this week, will offer a glimpse into how each publicly listed company is managing the impact.
The world has changed since the last time we heard from the executive ranks en masse. A global economic shock is taking shape, Canada is careening toward a recession and tariffs have struck at the viability of businesses from coast to coast.
This time around, the numbers themselves won’t really matter. First-quarter financial results are close to meaningless given how quickly the global economic order is shifting.
How chief executive officers are feeling and what kind of trouble they see coming their way this year and next is of much greater importance.
If corporate earnings are heading for collapse, the torrent of analyst conference calls to come over the next month should provide fair warning.
All signs point to the Canadian earnings outlook being “slashed,” Bank of Nova Scotia strategist Hugo Ste-Marie said in a note. “Negative revisions are only starting.”
Tariffs can hit a company from a few different directions.
Those that do cross-border business are among the direct casualties.
Canada may have been spared from the “reciprocal” tariffs U.S. President Donald Trump imposed on most of world earlier this month. But additional executive orders have levied tariffs on Canadian steel and aluminum, on the auto sector and on products that do not comply with the rules of origin under Canada-United States-Mexico Agreement.
The second-order effects of tariffs, however, are the much bigger problem.
The dense fog of uncertainty shrouding the Canadian economy is a powerful deterrent to investment of all kinds. Mergers and acquisitions have dried up. “It’s a pretty difficult time to price assets when you have this kind of uncertainty overhanging things,” Christopher Virostek, chief financial officer of West Fraser Timber Co. Ltd., said in an earnings call Wednesday when asked about M&A prospects.
Meanwhile, the market for initial public offerings is dead quiet. The Toronto Stock Exchange and the TSX Venture Exchange had zero IPOs in the first quarter. A new class of homegrown tech companies poised to go public appears to be waiting out the storm.
Other companies are setting aside expansion plans. Canadian paper products company KP Tissue Inc. said last month that a new tissue plant would have to wait, citing “uncertainty in the North American business environment.”
“We’re seeing less investment, more cash hoarding. Less hiring, more protecting capital,” said Sébastien Mc Mahon, chief strategist at iA Investment Management.
“That won’t hit earnings right away. But if we’re going to diversify our global trading profile, we need investment.”
When business investment falters, there are ripple effects throughout the economy. After all, one company’s investment is another’s revenue.
Little attempt has been made to revise TSX earnings estimates so far. In fact, the consensus forecast is for 17-per-cent growth over the next 12 months, according to FactSet numbers.
You can’t really blame analysts for failing to forecast the unforecastable. But a big hit to earnings would weigh heavily on Canadian stocks, which have been curiously strong through recent financial market convulsions.
Consider the two largest Canadian sectors. Energy accounts for about one-fifth of TSX earnings. But oil prices have been smoked over the past few weeks, which will weigh on the outlook for the oilpatch over the rest of the year.
Sitting atop the TSX are the banks. A few pressures are likely to emerge when the banks start reporting their second-quarter earnings in late May – low levels of capital markets activity, the national housing market slump and the risk of a recession causing a spike in loan losses, Mr. Ste-Marie said.
Considering the banks contribute nearly 30 per cent of the market’s total earnings, any blow to bank profitability would be tough for the TSX to overcome.
