This week marks the unofficial start of third-quarter earnings season, which might just usher in some positive news for a change.
Dragged down by energy and materials companies, total earnings for the S&P 500 have dropped year-over-year for five consecutive quarters. The last time earnings fell for five quarters in a row was the period ending in the third quarter of 2009 when the world was emerging from the financial crisis.
On the surface, it looks as if the third quarter will extend the string of losses. According to FactSet Research, the S&P 500 is on track for an earnings decline of 2.1 per cent, based on analysts' estimates. A sixth drop would mark the longest string of declines since FactSet began tracking the data in the third quarter of 2008.
Despite the negative projection, however, there may be some light at the end of the earnings tunnel. Typically, actual earnings come in slightly ahead of analyst estimates. That's because companies deliberately set the earnings bar low so that their results will beat expectations and – at least in theory – give their stock prices a lift.
Over the past four years, companies have beaten earnings estimates more than two-thirds of the time. The year-over-year earnings growth rate has increased by nearly three percentage points from the end of the quarter (when the growth rate is based on analyst projections) to the end of earnings season (when the actual numbers are in).
If that pattern holds this time around – which is by no means a certainty – actual earnings will rise by about 0.9 per cent in the third quarter, FactSet said.
"If the index does report growth in earnings … it will mark the first time the index has recorded year-over-year growth in earnings since the first quarter of 2015" when earnings eked out a 0.5-per-cent gain, FactSet said.
Aluminum giant Alcoa Inc. – traditionally the first major company to report – kicks things off on Tuesday before markets open. Analysts estimate, on average, that Alcoa will report earnings per share of 35 cents (U.S.), up from 21 cents a year earlier.
Alcoa's earnings will be watched closely as this will be its last quarterly report before it splits into two companies – one that retains the Alcoa name and will house the legacy mining and smelting business, and the other that will be named Arconic and focus on higher-margin aerospace and automotive products. The split, which is to take effect on Nov. 1, aims to bolster the value of the company, whose shares are down about 75 per cent from their 2008 high, having been battered by low aluminum prices and a supply glut from China.
Other notable companies on deck this week include Delta Air Lines Inc., which is scheduled to report before markets open on Thursday, and Citigroup Inc., JP Morgan Chase & Co. and Wells Fargo & Co., which are due up on Friday morning.
Housing starts to cool?
In a relatively light week for economic reports in Canada, Tuesday's housing starts data will be the main attraction north of the border.
"Housing starts have started to slip from higher levels reached at the beginning of the year, a negative for a Canadian growth outlook that has come to rely disproportionately on housing market activity," CIBC World Markets economist Nick Exarhos said in a report.
A seasonally adjusted annual rate of 190,000 starts in September is "likely the best that we can hope for," he said. While that would be a slight increase from 182,000 in August, it would mark a slowdown from several months in 2015 and 2016 when starts exceeded 200,000 on an annual basis. With the federal government trying to let some air out of the housing market, starts could continue to soften.
"Residential investment is likely to become a modest drag in the quarters ahead, as building activity slips from its current lofty levels," Mr. Exarhos said.
"Efforts to cool the housing market have the potential to dampen building activity more aggressively than previously forecast, although federal and provincial infrastructure spending should soften the blow to construction employment."
Fed minutes in focus
In the United States, all eyes will be on the Federal Open Market Committee minutes from the Sept. 20-21 meeting.The minutes, to be released Wednesday afternoon, will be scrutinized for clues as to when the Fed will raise interest rates. Fed fund futures contracts indicate a 10-per-cent probability of a November hike, and a 66-per-cent chance of a rate increase in December.
The other U.S. report to watch is retail sales for September. The previous month was a washout – literally – as the country experienced the second-wettest August on record.
"This had a dampening impact on consumer spending, and we look for a rebound in September," Michael Gregory, deputy chief economist with BMO Capital Markets, said in a note. BMO expects retail sales to rise by 0.9 per cent in September after falling 0.3 per cent in August, with strong auto sales contributing to the gain. The consensus is for retail sales to rise by 0.6 per cent.
John Heinzl