) 'unofficially' kicks off the fourth quarter earnings season
after the close today, and it promises to be a
less-than-inspiring reporting cycle. Total earnings for companies
in the S&P 500 are expected to be flat this quarter from the
same period last year, roughly similar to the flat growth finish
in the third quarter.
But with macro issues -- ranging from the 'Fiscal Cliff' and the
Fed to the outlook for Europe and China -- occupying investors'
attention, it isn't clear at this stage if the deteriorating
earnings picture will finally get the spotlight that it deserves.
Expectations have come down significantly enough for the fourth
quarter that actual results are unlikely to be worse than what we
experienced in the third quarter. Even the flat earnings growth
expected this quarter is better than the negative earnings growth
that was expected for the third quarter at the start of that
In the end, third quarter earnings were a lot less negative (down
only -0.1%), but that was a sharp contrast to the positive
earnings growth performance quarter after quarter since 2009.
Importantly, as the third quarter reporting season was getting
underway, consensus estimates for the fourth quarter looked for
earnings growth in excess of +7%.
The drumbeat of negative guidance on the third quarter earnings
calls brought down that growth expectation from +7% to the
current +0.4%. As is typically the case each quarter, most
companies will likely come ahead of these lowered expectations.
Guidance from management teams on the earnings conference calls
is always very important, but it will be even more critical this
earnings season. In the current post-Reg FD environment, company
guidance has become the primary tool through which managements
anchor the market's expectations. And earnings expectations for
the coming quarters appear unusually optimistic relative to what
we have seen lately.
Consensus estimates peg earnings growth to ramp up from the
flat-lined performance of the second half of 2012 to a roughly
+10% gain in 2013. Whether those expectations will hold or come
down will depend to a large extent on how management teams
describe business conditions on the fourth quarter earnings calls
in the coming days.
We will know more in the coming days as the earnings picture
evolves. But all indications are that estimates need to come down
given the unsteady and weak state of the global economy. Revenue
growth and margin expansion are the primary avenues through which
earnings could grow. And both of those avenues have already
played out. The market hasn't been particularly concerned about
this issue thus far, but it is difficult to envision investors
shrugging lack of earnings growth for long.
ALCOA INC (AA): Free Stock Analysis Report
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