TORONTO (Reuters) - Lofty commodity prices and the ability to turn a blind eye to signs of a US recession have allowed Toronto's main stock index to outperform nearly every benchmark this year - but the upcoming earnings season could end all that.

In early January and again in early March the Toronto Stock Exchange's S&P/TSX composite index plunged on a slew of concerns, headlined by fears the US, by far Canada's biggest trading partner, could fall into a recession.

But the TSX index, which at one point was down 13 percent for the year, bounced back each time and is now down just one percent in 2008, which has left many market experts scratching their heads for justification.

True, prices for many of the commodities that Canada exports hit record highs earlier this year. That helped cushion the market's slide, given its energy and materials sectors combine for about 30 percent of its weighting.

But unlike previous commodity rallies that were fueled by expectations of strong demand, the latest surge is being driven by investors moving into commodities because the US dollar remains under pressure and equity markets are choppy.

"People are ignoring warning signs and thinking that Canada can escape pretty much unscathed, but that's not going to be the case," said Elvis Picardo, investment strategist at Northern Securities Inc. in Vancouver.

"Commodity prices are holding at extremely good levels and the thinking is that the Canadian market will benefit from those high prices and offset any damage from, let's say, the financial sector."

Mr. Picardo said the first-quarter Canadian earnings season, which revs up in just about a week, will offer investors the first concrete information that profits have been affected quite badly across the board - and that will rattle stocks.

Toronto's key index eked out a 0.1 percent gain to 13,683.03 this past week, but the rise would have been much bigger had it not been for General Electric Co's disappointing earnings on Friday, which sparked a big sell-off across North America.

Canada relies heavily on the US to buy the bulk of its exports, so it would appear to be a no-brainer that a slowdown south of the border will hit the domestic economy.

Data released earlier this past week showed Canada's trade surplus jumped a startling 78 percent in February and the gain was entirely in trade with the US.

That report was just another in a long line of domestic data that has, for the most part, blown past estimates and shown little impact from the US slowdown.

"When people get a little more optimistic about the economy they also get optimistic about the possibility of commodity prices staying higher," said Mr. Picardo. "So, as a result, it's not just the financial group that rebounded but it's the energy and materials groups as well."

Another factor helping the TSX rally when it appeared down for the count is that nobody has any idea of just how severe a US recession could be and what kind of impact it will have.

It is likely a recession in the US today will have much less impact on the global economy than it would have had as recently as 10 years ago, when there were fewer big economic players to pick up a slack in demand.

"There's a theory that says if the US goes down they could take the whole world down with them and that would be obviously bad for commodities," said John Kinsey, portfolio manager at Caldwell Securities Ltd.

"But there's another school of thought that says it won't be as bad as all that because we have Brazil, Russia, India and China - and they can offset this."