Corporate canada and its shareholders are enjoying robust profit growth and dividend payouts. But earnings on the benchmark S&P/TSX composite index have flattened. Only three sectors of the market are creating that growth.

Corporate Canada’s profit-making is always volatile. Earnings peaks are usually short-lived. Late last year, earnings on the S&P/TSX composite index reached $490, moving up to a record high of $549 this past February. Since then, 12-month earnings adjusted to the index have dropped back as low as $535.

It looks like a peak —and that is a poor precedent. There have been six historic highs in earnings since the late 1960s. All have rolled over in a matter of months.

Unless gains in third and fourth quarter 2005 earnings are remarkably strong, there is an increased possibility our current earnings boom has ended.

This is the “what is” of the market, not what one hopes “will be” in the way of higher profits and dividends. Though analysts are fond of talking about stock prices in terms of expected earnings, they are still dealing with hopes rather than the reality of the recent past.

Because stocks in the same industry tend to run together — the analogy is to a wolfpack — the weakness in seven of the market’s 10 major divisions is anything but favourable.

The three growing sectors — energy, financials, materials — account for 71% of the TSX index’s market capitalization, so no wonder the overall earnings and dividend picture looks rosy. It adds up to a lop-sided bull trend.

The market’s engine of steady growth remains the financial sector. Financial’s index-adjusted earnings have doubled in the past three years, and the dividend has grown 67% in the same period.

Energy and materials sectors are the unsteady engines of earnings and dividend growth.

Energy sector wobbly

Energy sector index earnings have wobbled widely since late 2003. They reached a new peak in February. Dividends have grown only slightly this year, after a sudden rise more than a year ago.

Materials sector earnings have risen from below zero in 2002-03 to a recent $83. They have always been volatile. Only recently have dividends from this sector gained after a two-year spell of declining returns.

Despite this, materials stock prices are below their peak and have not been gaining relative to the composite index.

The rest of the market is underperforming — stock prices are, for the most part, failing to keep up with the meteoric gains by energy and slower gains by materials and financials.

Some sectors are definitely on the skids. Prime example: health care. This sector has lost more than half its value since 2000. Relative to the overall market, the sector is at its lowest level since the 1987 starting-point of the new TSX global industry classification system (GICS) indexes, which started being used in 2002.

Health care had zero earnings when 2002 started, and zero earnings again last year. Its current profitable spell has produced earnings that are below the brief 2003 high. The gain in the dividend looks great (doubling in 12 months), but the payout is negligible.

Information technology continues to lag. After its awesome plunge in 2000-2002, prices bounced in anticipation of some earnings. These arrived last year, but already are dropping sharply. So is the price index, and its position relative to the market.

Even hopeful sectors look less than impressive. Earnings in the industrial sector emerged from zero in 2003, but recently dropped. More significantly, the index is at a new low relative to the market, despite a price rise in the past two years. Sector dividends have scarcely changed since 2002.

Telecom services stock prices are at a post-crash recovery high. At times in the past 3½ years, this sector has outperformed the market, but the longer trend is downward. The situation has had little help from earnings, which have been essentially unchanged for more than a year. The dividend has grown, though, rising 29% in 12 months.

The market’s two consumer sectors have failed to generate profit growth although their stock prices have gained, albeit less than the overall market.

Over the past 2½ years, consumer staples and earnings have gone nowhere, rising for a while and recently falling below the 2002 high.

Consumer discretionary earnings reached a high in mid-2003 and currently show rising momentum.

@page_break@Dividend growth in consumer staples, the smaller of the two sectors, has been good recently (a 24% rise over 12 months), but has not improved since February.

Even utilities bring little joy to investors, with no growth in earnings since 2002 and dividends moving up at a speed glaciers used to enjoy. Furthermore, the stocks have underperformed the market since 2002, despite a recent uptick. IE