Equity investors are braced for shockingly bad third-quarter earnings. On that basis, Alcoa lived up to expectations with the debut results of the season. Profit fell short of forecasts because of a fall in global aluminum prices. On the other hand, revenue was up, suggesting there could yet be bigger potential for shares on the upside. Investors appear to have already priced in much of the global gloom.
Things obviously aren’t great. U.S. economic growth is slow, and could get slower still. Some economies around the world may even shrink. Forecasts by analysts for third-quarter earnings, meanwhile, may be too optimistic. Cost-cutting will account for a portion of any expansion, and that does not suggest companies are truly strengthening.
Long-term corporate health depends on the ability to sell more stuff. Third-quarter corporate revenue growth for S&P 500 companies will come in at 9 per cent, according to data from Thomson Reuters Starmine. That’s some way short of the quarter’s anticipated earnings increase of 13 per cent. Moribund job creation numbers suggest companies lack confidence in their ability to secure long-lasting expansion.
Profit prospects for next year, which will reflect the recent economic weakening, will also be a drag. Citigroup’s latest forecast is that global earnings will rise only 2 per cent in 2012. If Citi, in common with many of its peers, has a bias toward optimism, it means earnings could fall next year.
But current share prices may already reflect much of the despair. Citi reckons global equity markets price in an average global contraction in earnings per share of around 25 per cent. Today’s forward price-to-earnings ratio of global equities, according to Datastream, is 10.1, or nearly 40 per cent below the average since 1988.
The pitiful underperformance of equity markets – over a painfully long period – has worn the patience of investors to the bone. But if current share prices do reflect the worst-case scenario, there’s little to fear. As with Alcoa, there could be volatility in the face of high-profile disappointments. The bigger risk for shareholders, however, is they watch from the sidelines as companies are re-rated in response to unexpectedly good news.Report Typo/Error
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