After the market closes on Monday, Alcoa (AA) will report their earnings for the second calendar quarter, an event that is generally regarded as the beginning of earnings season. Then, over the next few weeks we will see a flood of reports that will give us a clearer picture of the health of corporate America.
Earnings season is always important; making money is, after all, the primary function of a corporation, but it could well be argued that this time around the substance and tone of the reports will be even more significant than usual.
From a substance perspective, I, and I suspect many others, will be looking at this quarter’s earnings in a somewhat different light. Usually what matters is how each company performed in relation to the expectations of analysts, expectations that are priced into their stocks. Obviously, for each individual stock, that still matters, and we can expect the usual two thirds or so of companies to beat those forecasts.
What will be different, though, is that this quarter there will be more of a focus on how performance stacks up on a year to year basis.
That is because there is a degree of concern among investors and traders about things bigger than any one company’s results. Stocks have held up remarkably well over the last couple of months, especially after the Brexit vote shock, but there are some signs of a “wall of worry” that will have to be climbed if that progress is to push us to new highs.
Sovereign bonds have seen strong demand despite record low yields. The U.S. 10 Year returns well below 1.5% and investors must pay to hold German and Japanese debt...a truly remarkable situation that somehow seems to get overlooked, or at the very least underplayed, but which signals some very real trepidation.
Even if we concede that this is due to extraordinary policy moves by central banks, the fact that they feel the need for those policies is a warning unto itself. Over the years I have found that if something looks worrisome but analysts keep telling you not to worry, it is usually better to trust your instincts.
In addition, what are generally seen as “safe haven” assets, things like gold and the U.S. Dollar, have been exhibiting strength, even as stocks have recovered to close to all time highs. That indicates that there are two very different views out there. Yesterday’s massive drop in crude on what were bad, but not that bad, inventory figures, showed that many of the bullish positions out there are extremely sensitive to news and that a sell-off can quickly become a rout.
The actual performance of corporations in the face of the weakness that has prompted those aforementioned ultra-dovish Central Bank policies will be of interest, but in many ways the forward looking comments of CEOs will be even more so. Do most see a general slowing of economic activity? How many feel that the prospect of a Brexit will have an immediate effect, or that the renewed dollar strength will pose a problem?
Estimates for the next quarter and beyond that many companies include in their earnings releases are always significant, but this time around they will be even more in focus.
Earnings season is always an interesting time, but after decades of predictable 60+ percent beats of estimates it has lost its ability to really give any defined direction to markets as a whole. The prevailing sentiment and the focus on broader issues may result in that changing during this season.
It’s going to be an interesting couple of weeks!