The downgrade of global economic growth by the International
Monetary Fund (IMF) this morning provides a fitting backdrop for
the start today of the third quarter earnings season.
This raises the prospect that most companies will cite the weak
economic environment to provide a subdued outlook for the fourth
quarter and beyond. And we should keep in mind that unlike for the
third quarter when consensus expectations are for earnings to
decline, current expectations are for earnings to stage a robust
recovery in the fourth quarter and beyond. The key question at this
stage is whether the expected downward revisions to forward
earnings estimates will have any bearing on the market's recent
momentum, which has pushed stocks to new highs for the year and
within striking distance of the all-time highs reached in the fall
of 2007.
Both companies reporting results today - Aluminum producer
Alcoa
(AA
) and fast-food restaurant operator
Yum! Brands
(
YUM
) - are exposed to the slowdown in the global economy. Aluminum's
demand comes from the automotive, homebuilding, and food processing
end markets, among others. It will be interesting to see how Alcoa
management characterizes the aluminum demand outlook in the face of
a weakening global economy and favorable domestic trends in the
homebuilding and auto sectors. Yum! Brands owes a lot of its
'growthy' reputation to its Chinese operations, which is in the
spotlight given that country's well known growth problems.
The point is that irrespective of how Alcoa and Yum! do relative
to third quarter expectations, what will drive these two stocks
tomorrow will be how the two guide on the core questions relevant
to their businesses for the coming periods. And what is true for
these two companies will be true across the board this earnings
season.
Expectations for third quarter earnings have come down enough
that most companies will likely beat them, as roughly two-thirds of
the companies do every quarter any way. But expectations for the
fourth quarter and beyond remain quite high, with earnings in
the fourth quarter expected to reverse the third quarter's decline
(the first in 11 quarters) and bring in a roughly 8% growth. For
full year 2013, total earnings are expected to increase in the low
double digits from the 2012 level. But it's unlikely that companies
will be able to achieve earnings growth even as the global economy
is slowing down, as this morning's IMF forecast shows.
My sense is that we will see a majority of the companies come
out with subdued earnings outlooks for the fourth quarter. And this
will cause earnings estimates for the fourth quarter and beyond to
come down. And this brings us to the key question of what this
expected earnings revisions trend will mean for the market. Will
the market continue to ignore this deterioration in the earnings
picture by hiding behind the Fed, as it has been doing thus far, or
start taking note? I am of the view that it wouldn't be able to
ignore the weakening earnings trend; but we will find out soon
enough.
The downgrade of global economic growth by the International
Monetary Fund (IMF) this morning provides a fitting backdrop for
the start today of the third quarter earnings season.
This raises the prospect that most companies will cite the weak
economic environment to provide a subdued outlook for the fourth
quarter and beyond. And we should keep in mind that unlike for the
third quarter when consensus expectations are for earnings to
decline, current expectations are for earnings to stage a robust
recovery in the fourth quarter and beyond. The key question at this
stage is whether the expected downward revisions to forward
earnings estimates will have any bearing on the market's recent
momentum, which has pushed stocks to new highs for the year and
within striking distance of the all-time highs reached in the fall
of 2007.
Both companies reporting results today - Aluminum producer
Alcoa
(AA
) and fast-food restaurant operator
Yum! Brands
(
YUM
) - are exposed to the slowdown in the global economy. Aluminum's
demand comes from the automotive, homebuilding, and food processing
end markets, among others. It will be interesting to see how Alcoa
management characterizes the aluminum demand outlook in the face of
a weakening global economy and favorable domestic trends in the
homebuilding and auto sectors. Yum! Brands owes a lot of its
'growthy' reputation to its Chinese operations, which is in the
spotlight given that country's well known growth problems.
The point is that irrespective of how Alcoa and Yum! do relative
to third quarter expectations, what will drive these two stocks
tomorrow will be how the two guide on the core questions relevant
to their businesses for the coming periods. And what is true for
these two companies will be true across the board this earnings
season.
Expectations for third quarter earnings have come down enough
that most companies will likely beat them, as roughly two-thirds of
the companies do every quarter any way. But expectations for the
fourth quarter and beyond remain quite high, with earnings in
the fourth quarter expected to reverse the third quarter's decline
(the first in 11 quarters) and bring in a roughly 8% growth. For
full year 2013, total earnings are expected to increase in the low
double digits from the 2012 level. But it's unlikely that companies
will be able to achieve earnings growth even as the global economy
is slowing down, as this morning's IMF forecast shows.
My sense is that we will see a majority of the companies come
out with subdued earnings outlooks for the fourth quarter. And this
will cause earnings estimates for the fourth quarter and beyond to
come down. And this brings us to the key question of what this
expected earnings revisions trend will mean for the market. Will
the market continue to ignore this deterioration in the earnings
picture by hiding behind the Fed, as it has been doing thus far, or
start taking note? I am of the view that it wouldn't be able to
ignore the weakening earnings trend; but we will find out soon
enough.
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