Alcoa has kicked off earnings season with the tone many analysts expected: Big, bright numbers that impress investors and add fuel to already bullish stock markets. But after this quarter, those eye-popping earnings gains may become harder to find.
The U.S. aluminum giant, traditionally the first big name out of the gate in the North American earnings season, announced a fourth-quarter profit from continuing operations of 21 cents (U.S.) a share - comfortably beating analysts' consensus estimate of 19 cents.
The better-than-expected results are consistent with the trend in earnings forecasts for the quarter, which have been creeping upward in recent weeks on growing optimism about the economy. The consensus estimate calls for year-over-year S&P 500 earnings growth of 32 per cent - which would mark the fifth straight quarter of better-than-30-per-cent year-over-year gains.
"We expect the upcoming earnings season to bring strong positive earnings surprises, which will, in turn, give a second wind to equity markets in the coming weeks," Brockhouse Cooper global macro strategist Pierre Lapointe said in a note to clients.
In Canada, meanwhile, the jump in energy and other commodity prices over the past quarter stands to propel earnings for the Canadian stock market well into 2011. The forecast for S&P/TSX earnings growth is a lofty 27 per cent for 2011 - on top of a similar pace for the fourth quarter of 2010.
But while the improving North American economy has analysts generally upbeat about earning prospects heading into 2011, they say the huge year-over-year growth numbers that have inspired investors in recent quarters are about to become a relic of the recession and recovery. This year and next promise to show more modest growth rates, as depressed comparisons from a year earlier fall off the charts.
The consensus forecast for 2011 S&P 500 earnings growth is a relatively tame 13.5 per cent, according to Thomson Reuters Research. In Canada, meanwhile, the non-resource component of the market is forecast to increase earnings by a modest 10 per cent this year.
"It's the last of the easy comps [year-over-year comparables]" said George Vasic, chief strategist at UBS Securities Canada Inc.
Recovery Levelling Off
Indeed, the recovery - which is expected to have propelled S&P 500 earnings upward by more than 30 per cent and the S&P/TSX composite by 19 per cent for all of 2010 - has already been levelling off in many sectors. On a sequential quarter-to-quarter basis, S&P 500 earnings barely moved in the third quarter of 2010, and are estimated to have again been flat in the fourth quarter.
In 2010, market strategists said, the bulk of the year-over-year earnings growth in both the U.S. and Canadian markets has centred on a single big sector - financial services, which suffered the most in the financial crisis and has been the last to recover. Year-over-year earnings growth for S&P 500 financials stocks is estimated at almost 1,400 per cent - even though the quarter-to-quarter growth has been negligible since the first quarter of 2010.
"While the current earnings estimate for [the 2010 fourth quarter]is not abnormally high, the year-ago actual earnings are extremely low," Thomson Reuters said in a report.
Already Priced In
Analysts also noted that investors have already been pricing in a bullish fourth-quarter reporting period, as seen in the gains in both the Canadian and U.S. stock markets in recent weeks. The S&P 500 is up nearly 8 per cent since the start of December, while the S&P/TSX composite index is up more than 5 per cent.
"It's fair to say people are expecting some pretty strong earnings," Mr. Vasic said.
Even with a tailing off of the big earnings-growth numbers, though, analysts see cause for optimism on the earnings front in 2011 - and, by extension, room for the North American stock markets to forge further gains in the year.
Goldman Sachs chief U.S. economist Jan Hatzius said the current outlook for the U.S. economy - with solid growth in gross domestic product combined with a still-weak labour market - is particularly supportive of corporate profit growth.
"A large amount of slack in the economy - and specifically in the labour market - tends to reduce the share of output going toward labour costs, which make up about 60 per cent of total business costs," he said.