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Third-quarter earnings season

Robert Miehm

Robert Miehm: Earnings season is just about complete in Canada. As of this past Monday, about 95% of TSX companies had reported their September quarter end. Of those companies that have reported, about 30% reported above expectations, and about 35% have reported below expectations, with the remainder reporting in line.

Looking at the earnings surprise chart, health care stands out as it appears to have the most positive earnings surprises. Consumer defensive stands out as it appears to have the most negative earnings surprises. The caveat here is that there are very few companies in these two sectors to provide a useful comparison. For example, of three health care stocks reporting, two had a positive report and one reported in line.

Another way to look at earnings surprise is using an index weighted surprise as shown in the chart here. In this chart we see that only consumer cyclical and to a larger extent, utilities have negative weighted earnings surprises. Heath care, energy and technology stand out with positive weighted surprises.

If we look at current sector valuations relative to their 10-year historical medians, real estate, consumer defensive, communication services, industrials and technology are more richly valued. Basic Materials and Health Care have valuations that appear to be relatively more interesting at these levels.

And finally, looking at earnings expectations for the year ahead, we see year-over-year growth in expected earnings is lowest in health care, financials and communication services, and highest in the real estate and utilities sectors, although there are double-digit growth expectations in many sectors.

For Morningstar Investment Management, I'm Rob Miehm.