If Alcoa Inc. is the bellwether for U.S. corporate earnings that it's cracked up to be, the third-quarter reporting season may deliver the market an Indian summer – a deceptive warm spell serving as a fleeting prelude to a cold winter.
The aluminum giant, whose traditional role as the first major U.S. company to issue its earnings report each quarter has made its numbers a focal point for market watchers, came out late Tuesday with considerably better-than-expected profits: 11 cents (U.S.) a share before one-time items, roughly double the consensus estimate.
That cast an early ray of sunshine to an earnings season that few expect to be particularly bright. Wall Street's year-over-year earnings growth estimates for the S&P 500 for the third quarter are in the range of 3 to 4 per cent, which would be the second-slowest quarter for profit growth since 2009. But the forecasters have been overly gloomy before; might Alcoa be an early hint that they have undershot again this time?
Well, maybe. But Alcoa hasn't historically been much of a guide for how an earnings season will go. In fact, even its own happy numbers aren't nearly so encouraging when you look at the details. What they show, said Deutsche Bank analyst Jorge Beristain, are the positive effects of a lousy quarter for the U.S. dollar, which served to juice Alcoa's profits from foreign operations. From early July to the end of September, the U.S. dollar slumped 5 per cent against a trade-weighted basket of competing currencies.
The overall U.S. market might well enjoy a similar bonanza from the greenback's third-quarter losing streak: More than 40 per cent of S&P 500 sales typically come from outside the United States. That suggests some upside to the third-quarter earnings picture, but it's unlikely a similar slump in the currency will be repeated soon.
Indeed, Alcoa's guidance for the rest of the year prompted analysts to scale back their fourth-quarter forecasts. Mr. Beristain said Alcoa's fourth-quarter earnings now look poised to be even smaller than the modest third-quarter result, and he expects the company to reduce its capital spending for the full year, amid weak metal prices, rising costs and a less favourable foreign-exchange environment.
Those could prove to be common themes this earnings season – pessimistic earnings guidance and a scaling back in spending plans, particularly in resource-related businesses that have been hit with weak prices. (For watchers of the commodity-heavy Canadian stock market, take note.)
A cautious tone has already pervaded the lead-up to the third-quarter reporting period; corporate earnings tracker FactSet said that to date, 90 companies on the S&P 500 have lowered their earnings guidance for the third quarter, versus only 19 raising guidance. That's the most negative the corporate outlook has been since FactSet started tracking company guidance statements in 2006.
As further guidance rolls out, don't expect the outlook to get more cheery. Companies are looking at uncertain economic growth, an unclear path for Federal Reserve monetary policy, and a U.S. government shutdown whose threat to the global economy grows with each passing day. Many firms are going to sound a lot like Alcoa did – focusing more on playing defence than offence.
David Parkinson