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Canada’s fourth-quarter earnings season is under way with high expectations for resource companies amid surging commodity prices and more headwinds anticipated among consumer names affected by inflation and pandemic lockdowns.

Rising prices and supply chain setbacks will again be common themes in Canadian corporate earnings reports in the weeks ahead. The expectation for rising interest rates is also likely to factor into many corporate outlooks, as the Bank of Canada sets the stage for increases, potentially as early as March.

“The bottom line is costs are going up and certain companies are able to adjust quicker than others,” said Craig Jerusalim, senior portfolio manager at CIBC Asset Management. “For some companies that see rising costs, it eats into their margins and those companies are going to show lower profitability than the ones that are able to absorb the higher costs by raising prices.”

Meantime, rising prices for oil, copper and other commodities are expected to bring a windfall for many resource names. U.S. energy giant Halliburton Co. HAL-N recently reported its biggest quarterly profit in seven years and increased its dividend for the first time since 2014. Canada’s energy sector is also expected to impress when companies such as Suncor Energy Inc. SU-T, Enbridge Inc. ENB-T, Cenovus Energy Inc. CVE-T, TC Energy Corp. TRP-T and Canadian Natural Resources Ltd. CNQ-T report in the coming weeks.

In aggregate, fourth-quarter earnings for companies in the S&P/TSX Composite Index are estimated to rise by 30.5 per cent year-over-year, according to Refinitiv data. TSX revenue growth is estimated to come in at 16 per cent for the latest quarter, driven by energy (51.7 per cent), materials (26.3 per cent) and industrials (14.6 per cent).

Consumer cyclical stocks, which include industries such as automotive, entertainment and retail, are expected to see their revenues drop by about 6 per cent, the most for any sector. The only other sector expected to see a revenue drop in the quarter is consumer non-cyclicals, which include utilities and other largely recession-proof companies, which are expected to lose 2.2 per cent in revenue in the quarter.

Earnings south of the border are also signalling a strong earnings season ahead in Canada. Out of 100 companies in the S&P 500 that have reported, 81 per cent delivered better-than-expected results, according to Refinitiv. Earnings for companies in the S&P 500 are expected to increase by 24.4 per cent for the October-December quarter.

Investors will likely see many earnings beats and potentially dividend increases and share buybacks from energy and base metals companies in particular, said Mike Archibald, vice-president and portfolio manager at AGF Investments Inc.

“I think you’ll still see positive surprises, particularly the E&P companies that continue to be flush with cash,” he said, particularly after years of cutbacks that have helped to streamline their operations. “The discipline in the broader energy market has been quite good.” (E&P refers to the exploration and production segment of the industry.)

Industrial companies, such as Canada’s two main railways, are also set to benefit from growing demand for the commodities it transports, despite supply chain challenges in the quarter, he said.

Canadian National Railway Co. CNR-T, Canada’s largest rail operator, unofficially kicked off earnings season on Tuesday, reporting profit and revenue that beat analyst expectations alongside a 19-per-cent dividend increase and a new share-buyback program. Rival Canadian Pacific Railway Ltd. CP-T is expected to report its latest quarterly earnings after the markets close on Thursday.

While the sentiment is largely positive for this earnings season, investors should brace from some volatility, says Justin Flowerday, managing director at TD Asset Management.

“It’s going to be very difficult to predict where earnings are going to come in for certain companies,” he said.

It could also be hard to forecast how markets will react to earnings beats and misses. Mr. Flowerday points to streaming giant Netflix Inc. NFLX-Q, which saw its stock sell off after reporting slowing subscriber growth, even though earnings were in line with expectations. Other companies that were popularized by the pandemic have also seen their shares tank, such as home fitness retailer Peloton Interactive Inc. PTON-Q.

“The appetite for high-growth companies trading at really high multiples with large expectations embedded in them – for them not to beat by a whole bunch is not being taken well by the market,” he said.

Mr. Jerusalim of CIBC anticipates many companies will blame pandemic lockdowns, supply chain snarls and inflationary pressures for earnings not coming in as strong as expected. He suggests investors look for companies that can better manage the disruptions and can pass on some of those higher costs to their customers.

He also prefers the broader Canadian market over the United States right now, given its concentration in commodities, industrials and financial services that stand to benefit from higher resource prices and expected interest rate hikes.

“In Canada, valuations are rather attractive on a relative and historical basis,” Mr. Jerusalim says, while also warning investors should prepare for more market volatility ahead – and consider it a chance to buy some bargains.

It’s giving investors a really good opportunity to uncover profitable businesses that are generating real cash flows, growing faster than their peers and trading at much more attractive valuations, he said.

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