Alcoa earnings not much of a harbinger

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With Alcoa second-quarter earnings coming in after Monday's market close at a brisk 14 per cent (a couple of pennies) above analysts' consensus estimates, the knee-jerk expectation is for a positive reaction from the stock markets Tuesday morning. After all, it has a reputation as an earnings bellwether - and it wouldn't be much of a bellwether if its results didn't guide market sentiment, now, would it?

Well, that's what we wanted to find out. We wondered whether Alcoa's status as the unofficial canary-in-the-coal-mine for the U.S. earnings reporting season goes any deeper than the fact it is the first major company to report its results each quarter. More to the point, we wanted to see if significant surprises in Alcoa's results are any sort of harbinger for the direction of the U.S. stock market beyond the immediate knee-jerk impact.

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What we found was that shockers in Alcoa's results don't even provide a consistent indication of where the U.S. market is headed the day after the numbers come out - let alone over the months immediately following the quarterly reporting period.

BELLWETHER WITH A HOLLOW RING

An examination of significant Alcoa quarterly earnings surprises over the past five years - which we defined as a miss, either positive or negative, of 10 per cent or more relative to Bloomberg's consensus estimates - shows little if any relationship between Alcoa's big earnings surprises and the subsequent direction of the S&P 500.

In the five instances where Alcoa's earnings came in more than 10 per cent below the consensus call, there was a tendency for the broader market to decline the next day, though the declines were generally tiny.

Alcoa earnings surprises and subsequent S&P500 performance

Source: Bloomberg News

Looking one month and three months out, the S&P 500 has been only slightly more likely to be trading lower following a big Alcoa earnings miss than trading higher. Clearly, Alcoa earnings misses have been no great harbinger of a negative market tone over the subsequent earnings reporting period.

Even more to the point of Alcoa's upside earnings surprise in the latest quarter, the company hasn't served as much of a leading indicator for the market when its results substantially beat expectations, at least in recent years. While its solid earnings beating expectations in last year's second quarter presaged a strong summer rally, an even better beating of the consensus numbers back in 2006 was followed by a lacklustre market.

WHY NOT ALCOA?

These findings certainly suffer from a lack of data points; Alcoa has only missed analysts' quarterly consensus estimates eight times in the past five years, and several of those quarters were clearly overwhelmed by other major issues that gripped the market at the time, especially in the collapse and subsequent sharp rally of the past two years.

But these data do suggest that market watchers have been confusing Alcoa's primacy in the earnings season with its significance as an indicator of broader market trends. The evidence suggest the market doesn't go as Alcoa goes. Being first may make the stock the focus of attention, but it doesn't make it representative of the broader market - and it doesn't make it much use if you're trying to place a bet on the fallout of the reporting period.