Canadian companies to motivate TSX

Canadian corporate earnings will be under the microscope this week as investors determine whether the economic recovery is starting to lose steam, or if there’s still reason to remain optimistic.

Canadian corporate earnings will be under the microscope this week as investors determine whether the economic recovery is starting to lose steam, or if there’s still reason to remain optimistic.

Some of the country’s biggest companies are slated to report second-quarter results with much of the parade to start on Tuesday.

First up are CGI Group Inc. (TSX:GIB.A) and Teck Resources Ltd. (TSX:TCK.B), while Wednesday will mark a diverse slate ranging from media company Torstar Corp. (TSX:TS) to mining giant Goldcorp Inc. (TSX:G).

Analysts will be sifting through the details of the financial reports to find true signs of strength for the remainder of the year.

Revenue will be key for markets to gain sufficient optimism, suggested Juliette John, portfolio manager at Bissett Investment Management in Calgary.

She said in recent quarters, “earnings were very, very strong, but the revenue line continues to be a disappointment and a lot of the drivers for earnings growth have been cost-cutting.”

“At some point the game is over, so to speak, in that there’s only so many costs that can be cut, and we really do need to see some top-line momentum.”

U.S. companies began reporting second-quarter earnings about two weeks ago and the results have convinced investors that the economic recovery is proceeding. Still, some pessimism persists in Canada, particularly when it comes to whether the speed of the recovery will slow down into next year.

Scotia McLeod portfolio manager Steve Uzielli said that second-quarter results will likely be received positively, though it could also mark the “last decent growth quarter” this year.

“Our expectation is that earnings estimates for 2011 by analysts are too high, and are likely to be revised lower over time,” he said.

Aside from earnings, North American markets will get some motivation from action overseas as European investors have their first opportunity to respond to the results of “stress tests” on the region’s banks which were released after markets closed on Friday.

The tests were designed to predict whether banks could survive a downturn in the economy and showed just seven of 91 European banks tested would fail. The European Union said the results should put to rest questions about the health of the continent’s financial sector. North American markets had a chance to respond to the tests on Friday, and surged higher after a relatively cautious trading.

In economic data, the latest round of GDP numbers are due on both sides of the border and economists generally expect the data to show that economic growth is starting to slow.

U.S. real GDP for the second quarter and Canadian GDP for May are both due on Friday.