Companies on the Toronto Stock Exchange will begin reporting fourth quarter results this week, and operating profits are expected to be positive for the first time in five quarters, according to a new report by CIBC World Markets.

In fact, consensus expectations call for TSX operating profits to be up 43% from the same quarter last year, after four consecutive quarters of declines, the report shows.

“The gain for the TSX looks like a tough wall to climb, but will in fact benefit hugely from an easy comparison with a year earlier, when both the Canadian and global economies sank into recession, dragging commodity prices and profits down,” says CIBC senior economist Peter Buchanan, who wrote the latest TSX Earnings Watch report, released on Monday.

Buchanan expects the bulk of the increase will be driven by two sectors: insurance and mining. He notes that insurers lost more than $1 billion in the year-earlier quarter as a result of adjustments on segregated funds and some of their other assets and liabilities. That sector is expected to see profitability jump by more than $3 billion.

The diversified mining group, meanwhile, is expected to see a $1.5 billion improvement on a year earlier, aided by the strong metals-led rally in commodity prices.

“Based on the street’s latest estimates, gains in those two segments will account for about three quarters of the total year-on-year rise in earnings,” says Buchanan.

Other sectors poised to show the largest increases include health care, information technology and utilities. In addition, gains by gold and base metals producers should help to lift earnings in the materials sector despite the drag on the chemicals industry from softer fertilizer prices.

Overall, earnings in seven of the 10 major TSX market sectors are expected to show improvement on the year.

Buchanan notes that the 43% jump in operating profits will nevertheless translate into a 26% drop for the year as a whole.

“That’s a sizeable setback,” he says, “although still better than the 80% decline in earnings in the early 1990s recession, when commodity prices plumbed even greater depths.”

The report acknowledges that some of the gains in profit have so far been driven by cost-cutting efforts rather than revenue growth. But it argues that some sectors should show fairly good top-line momentum for the fourth quarter, including mining, health care and high tech firms. In addition, the report says improved market conditions will benefit revenues in the financial sector.

Buchanan says firms are likely to have trouble meeting expectations for 2010 earnings growth, which call for 26% year-over-year growth.

“Although such increases have occurred after past recessions, that has generally been in the context of stronger economic recoveries than we expect this time,” he says, noting that the scaling back of stimulus spending in Canada and the U.S. will act as a drag on the recovery.

IE