Earnings trends in the Canadian market provide weak support for a bullish outlook. At best, earnings growth is slight; and in some sectors, earnings are dropping.

There is a huge divide between income trusts and equities. Income trust earnings have dropped heavily, while equities earnings — as shown by the S&P/TSX equities subindex, the equities-only version of the S&P/TSX composite index — are flat. (See accompanying charts.)

Adjusted to the income trust subin-dex, that sector’s earnings dropped by 52% in the 12 months ended Jan. 31 and dropped by 26% in the six months ended Jan. 31. Meanwhile, income trust distributions have risen by 18% in the 12 months. As a result, distributions are now 2.4 times earnings. Two years ago, the ratio was 1.4 times earnings.

The dividend on equities in the S&P/TSX composite index looks much safer. The payout ratio is 31%, a percentage point lower than it was two years ago.

Yield on the equities subindex has grown to a slim 1.9%, a rise of 17% in the 12 months. Meanwhile, the yield on the income trust subindex has risen by 6% in this period, to a high of 9.8%.

The downward earnings trend is most pronounced in the S&P/TSX small-cap subindex. Since the first quarter of 2007, the small-cap subindex has been entirely separate from the composite index. In the six months ended Jan. 31, its earnings dropped by 49%, while index dividends fell 6%.

Earnings trends point downward in two of the three industry sectors that dominate the Canadian stock market. The sectors — financial, energy, materials — account for 76% of the Toronto Stock Exchange’s market capitalization.

Energy sector earnings, as shown by the S&P/TSX energy sector subindex, have dropped by 31% in the 12 months, including a 12% drop over the most recent six months. Materials sector earnings are up by 11% over the year, but have dropped by 5% in the six months.

Financial sector earnings, though, continue to push higher. They have gained 7% in the 12 months and 3% in the six months.

These three sector subindices are separate from the capped subindices used to report market movements hour by hour.

Investors are paying less for financial sector earnings, but more for energy and materials. Although the financial sector’s price/earnings multiple has dropped to almost 13, the materials multiple remains high, at 25, and the energy multiple has risen to almost 17.

As dividends paid by the financial sector rise and the subindex price drops, the yield has risen. At 3.6%, the financial sector yield is 26% higher than that of 12 months earlier. This results in a price drop of 9% and a 15% increase in dividends.

Dividends in the energy sector have become significant only recently, increasing almost tenfold in five years. But with the subindex price level fairly flat over the past year, the yield has risen to 3.2%.

In contrast, dividends figure minimally in the materials sector. The yield is 0.7%, as payments have dropped by 13% in the 12 months while the subindex price level has reached a new high.

Of the remaining seven industry sectors in the S&P/TSX composite index, only four account for as much as 5% of market cap. Of these four, information technology has no current earnings and industrials earnings are dropping. Earnings are gaining in the consumer discretionary and telecom services sectors.

Dividend income among these four sectors is most significant for telecom services. Its dividend growth slowed again to 4% in the latest six months. As the subindex’s price has dropped, the yield has gained sharply to 3.7%. Most encouraging is earnings growth — up by 30% in the past 12 months, and up by 35% in the past six months.

Despite a 29% rise in earnings over 12 months, the consumer discretionary subindex has dropped steeply. The subindex’s dividend has dropped by 3% in the latest six months, lifting the yield to 2.8%.

In the industrials sector, earnings have dropped from their high last year, although rallying by 9% over six months. The dividend payout has reached a new high and now provides a 2.1% sector yield.

With no earnings and a slim dividend, the IT sector has appeal only for capital-gains potential. The subindex has dropped by 16% since last fall, so that remains a hope.

@page_break@Of the three remaining minor sectors, earnings in health care are recovering from a period of losses. The dividend has increased sharply, but health care accounts for less than 1% of the TSX market and the subindex contains only four stocks of significant size.

Earnings for the utilities sector — comprising less than 2% of the overall market — are dropping. Dividends have been growing slowly. The subindex’s 4.3% dividend yield is high, but so is its P/E multiple, which is almost 28 — double the multiple investors were willing to pay for utilities four years ago. IE