The TSX advantage: Earnings forecasts are rapidly rising

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Canada's benchmark index is standing out among its global counterparts this year, and in a good way. The S&P/TSX composite index is up 5.5 per cent, outperforming benchmarks in Europe, Japan and the United States. But the Canadian index is looking good based on another measure as well: Earnings expectations are heading higher.

According to Stéfane Marion at National Bank Financial, earnings estimates over the past month have been rising at a pace not seen in three years, with energy stocks and financials leading the way.

At the start of the month, analysts estimated that Canadian earnings would rise 12.9 per cent over the next 12 months, versus expectations for earnings growth of 9.4 per cent in the case of the S&P 500.

"In our view, further upward revisions are possible if, as seems likely, the Canadian dollar remains low for a while, supporting the profitability of export producers," Mr. Marion said in a recent report.

The energy patch offers a clear picture of what is going on. Analyst estimates for Suncor Energy Inc. have risen to 94 cents a share, up from an estimate of 86 cents a share about a month ago. The company will report its quarterly results on April 28.

Canadian Natural Resources Ltd. offers a similar example: Estimates have risen to 79 cents a share, up from 70 cents a share. The company doesn't report its quarterly results until May 8, but the stock has already rallied 22 per cent this year.

For the S&P 500, earnings have become a source of concern. According to S&P Capital IQ, analysts are estimating earnings will contract by about 1 per cent in the first quarter, over last year, raising concerns about the benchmark index's valuation.

Some strategists believe the first quarter is an aberration, with earnings struggling because of the harsh winter. The bullish view is that earnings will then pick up throughout the rest of the year, leaving the bull market intact.

But investors have been gravitating toward Canadian reality rather that U.S. promise. As Mr. Marion points out in a report on Wednesday, foreign investors made $6.1-billion worth of net purchases of Canadian securities – including stocks and bonds – in February, marking the largest inflow in three months.

Over the past six months, foreigners bought a total of $27-billion worth of Canadian equities, which is the biggest inflow in a decade.

Still, Canadian stocks have a ways to go to capture the popular imagination. The S&P/TSX composite index has lagged the annual performance of the S&P 500 over the past three years straight. And since the start of 2011, the Canadian index has lagged with a return of just 6.4 per cent, versus more than 46 per cent for the S&P 500 or 62 per cent in Canadian-dollar terms.

The S&P/TSX composite index is outperforming in 2014, but it has a lot of catching up to do.