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Canadian stocks and their underlying earnings are getting reacquainted after spending most of the year drifting apart.

Even while the earnings backdrop has been consistently supportive, it was shaping up to be a lost year for domestic shareholders until a recent rebound.

Now with the calendar year's final earnings season about to get under way, the uptrend in profits finally finds equities in a comparable pattern.

Strong stock fundamentals have offered signs that the pessimism toward Canada has been excessive, Brian Belski, chief investment strategist at BMO Nesbitt Burns, wrote in a recent note.

"This awakening is long overdue as we believe Canadian investors have been mired in an overly pessimistic view on commodities, the Canadian dollar, and Canadian housing dynamics."

This week sees some of the S&P/TSX composite index's earliest reporters release their financial statements for the third quarter. Rogers Communications Inc., Canadian Pacific Railway Ltd., AltaGas Ltd. and Corus Entertainment Inc. are the bigger companies on the earnings docket.

They will offer the earliest glimpses into whether the year's strong record in earnings beats and revisions can continue through the autumn.

The first two quarters of the year saw Canadian companies, on average, beat expectations on what were huge forecast increases to begin with.

Year-over-year earnings growth came in at 21 per cent last quarter and 28 per cent in the second quarter, according to Thomson Reuters.

Those numbers were inflated, however, as a result of easy comparisons. In the same quarters last year, profits in the energy sector were still stricken by the oil price shock resulting from the global oversupply.

As the crude market stabilized, the oil and gas sector emerged from the worst of the downturn with leaner, more efficient businesses and some big increases in quarterly profits.

Energy stocks, on the other hand, were unstirred by the profit upturn, as the oil glut proved to be stubbornly persistent. In the year to date up to early July, the S&P/TSX Capped Energy Index declined by 25 per cent.

The financials sector, meanwhile, was fighting its own battles, as fears over the housing market and the problems surrounding alternative mortgage lender Home Capital Group Inc. weighed on investor sentiment.

Consistently solid earnings performance was not enough to elevate even Canada's mighty bank stocks, which in the first eight months of the year were flat.

With energy and financials accounting for 56 per cent of the S&P/TSX composite index, there was too much downward pressure for the index to overcome.

Up to mid-August, the Canadian benchmark was a global standout as one of the very few to be in the red on the year, while the average developed market's national index had seen gains in the high teens.

Not only have Canadian stocks been out of sync with earnings trends, but also domestic and global economic readings.

"Much like the positive economic surprise we have seen over the last few quarters, the broadly positive earnings surprises and consistent uptrend in revisions confirm to us that the pessimism surrounding Canada is overdone," Mr. Belski said.

Thomson Reuters is forecasting a jump in third-quarter earnings of around 11 per cent over the prior year, as the profits recovery starts to moderate.

"The boost from easy comparisons is starting to wear off," said Vincent Delisle, a portfolio strategist at Scotia Capital, pointing out that the trough in Canadian earnings was hit in the first quarter of 2016.

However, there is still a big discount on domestic equities relative to U.S. stocks.

The disconnect between U.S. and Canadian stocks this year opened up a valuation gap that Mr. Delisle pegged as the widest in 15 years.

That differential has barely budged over the last month, even as the S&P/TSX composite index has staged an impressive rally, rising by 5.5 per cent.

A nearly uninterrupted uptrend in U.S. stocks this year continues to ring in new record highs, inflating valuations as the S&P 500 index sits on a 14-per-cent gain year to date.

The streak has been fuelled by an insatiable appetite for high tech, health care and consumer stocks, of which the Canadian market has precious little.

"When that trade eventually flips, you may see some domestic money pull out of the U.S. market," said Ryan Bushell, vice-president and portfolio manager at Leon Frazer & Associates.

"Maybe we see energy, financials, and industrials start to lead, and maybe consumer, technology and health care take a back seat. They've got to be pretty tired, they've been running hard for five years," he said.

Mr. Bushell said he sees Canada's bank stocks increasingly taking cues from earnings and economic strength.

"I think there's some good momentum in financials, which is the biggest thing to push the TSX higher for the rest of the year."

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