Submitted by
Wall St.
Daily
as part of our
contributors program
.
Last week,
Alcoa
(NYSE:
AA
) officially kicked-off third-quarter earnings reporting
season.
I've always shunned reading too much into a single company's
report, particularly Alcoa's. Now I have all the hard evidence I
need to back me up.
In honor of Myth-Busting Mondays, let me first prove to you why
the aluminum giant's earnings mean - in the emphatic lyrics of
Edwin Starr - "Absolutely nothing!"
Then in my next column, I'll share the three statistics that
really
matter this earnings reporting season.
Let's get to it…
Old Traditions Die Hard
It's been a long-standing tradition on Wall Street to treat
Alcoa's results as a barometer for the health of the global
economy. And, more importantly, as a leading indicator of what to
expect when the rest of corporate America reports results.
Part of that tradition can be attributed to the fact that
Alcoa's the first company in the Dow 30 to report results - and
that its products are traditionally vital to the economy.
Simply put, old traditions die hard. But it's time to euthanize
this one.
Why? Because as Art Hogan, Market Strategist at Lazard Capital
Markets, points out, manufacturing accounts for only about 15% of
the U.S. economy. Plus, very little aluminum goes into
manufacturing outside the construction and auto industries.
Translation: As manufacturing's contribution to the U.S. economy
keeps shrinking, Alcoa's significance does, too. Or as Standard
& Poor's Howard Silverblatt, says, "Materials is an important
sector, but it's very small and not very indicative."
Accordingly, trying to use Alcoa's results alone to predict the
outcome for a service-dominated economy makes little to no sense
anymore.
The latest data proves it, too…
Since 2009, when Alcoa missed earnings estimates, 72.4% of the
companies in the S&P 500 Index actually
beat
estimates, according to FactSet data. So much for predicting the
fate of corporate America.
What about Alcoa's ability to forcast the direction of the stock
market, though? Again, the connection is weak, at best.
Fifteen out of the 19 times that Alcoa beat expectations over
the last 10 years, the S&P 500 Index increased in value over
the next three months.
However, when Alcoa missed expectations over the same period,
which is supposed to be an ominous sign for the market, the S&P
500 dipped a mere 0.6% over the next three months. (If the prospect
of a 0.6% dip in prices scares you, you shouldn't be invested in
the stock market. Just saying.)
As John Butters, Senior Earnings Analyst at FactSet, says, "It
appears that Alcoa's earnings performance relative to estimates has
little predictive value in determining the earnings performance of
the remaining companies in the [S&P 500] Index."
Bottom line: Consider this yet another myth busted. Alcoa's
results hold no more predictive ability than the gizzard squeezers
who tried to tell the Roman emperors when the Huns would attack (to
paraphrase Peter Lynch).
So the fact that Alcoa beat results this quarter is meaningless.
What really matters are the three factors I'm going to discuss in
my next column on Wednesday. So stay tuned.