Uncertainty looms large as earnings season starts

The fourth-quarter earnings season is likely to feature an uneasy combination of caution and celebration.

By The Fiscal Times Jan 11, 2013 11:58AM
The Fiscal Times logo Stock market report CorbisBy Suzanne McGee

The fourth-quarter earnings season just underway is likely to feature an uneasy combination of caution and celebration -- a mix that was on display even as Alcoa (AA) got things off to a rip-roaring start Tuesday by reporting an actual profit of 21 cents a share, in spite of the fact that aluminum prices tumbled by about 12% over the course of the year.

Alcoa's earnings report is usually seen as the "official" start of the reporting period, given the company's size, its early reporting date and the notion that -- to some extent, at least -- it can be viewed as a kind of harbinger because it supplies so many parts of the U.S. economy. In most years, its utility as a signal is rather minimal. This year, however, what's important to note is the fundamental improvement in results, combined with the sense from management that they may still be treading on thin ice.

A recent stabilization in the price of aluminum helped Alcoa improve its bottom line, as have cost-cutting efforts and an increase in sales to the aerospace industry, a business that has higher margins than many other of Alcoa's divisions. Nonetheless, while Alcoa's execs took an upbeat tone when discussing these results and their outlook for 2013 with investors on a conference call in the wake of the announcement, they were careful not to encourage any festivities. "There is still uncertainty," said Klaus Kleinfeld, referring primarily to the potential impact on defense spending of budget negotiations in Washington.

Looking beyond just Alcoa, it will be tough to draw many sweeping conclusions from results for the just-ended fourth quarter because of all the one-time events that affected corporate profits. Airlines dealt with bad weather; retailers had keep stores closed for days or weeks as consumers stayed home to deal with floods or the lack of gasoline in the wake of Hurricane Sandy. That accounts for a lot of the cutbacks to analysts' estimates that took place steadily throughout the quarter and trimmed the forecast for S&P 500 profits growth by more than a third to only 3% over year-earlier levels.

Some sectors have seen estimates fall dramatically. While the banks are expected to show the greatest growth in earnings for the fourth quarter -- 14.5% -- that is only a shadow of the 28.9% increase that analysts had been calling for at the beginning of October. As for materials stocks like Alcoa, well, a forecast of a 21.9% increase in profits became meager expected growth rate of 0.7% by the end of the quarter. Technology stocks -- thanks in part to Apple's (AAPL) struggles -- are likely to see a forecast 9.4% growth in profits as of early October become a 1% decline in earnings when the results for companies in the sector are finally logged, analysts now say.
In light of those big cuts in analysts' estimates, the fact that earnings season has started with "positive" surprises from about two-thirds of the 25 companies in the S&P 500 to have reported so far is really not that significant. Set in the context of what has happened since early October, all it really means is that analysts were slightly over zealous in cutting back forecasts, not that the companies are topping those original forecasts dating back to early October.

The question on all minds now is whether what's to be an underwhelming level of earnings growth for the fourth quarter represents some kind trough. As Jeff Kleintop, market strategist at LPL Financial, points out, if fourth-quarter profits do prove to be the lowest in any quarter of 2012, this will be both unusual and unwelcome. Traditionally, he says, when the economy is growing the fourth quarter often is the period in which companies report the strongest earnings.

At the moment, Wall Street is predicting that companies in the S&P 500 index will report earnings growth of about 10% in 2013. That's not dramatic, but better than the 3.7% or so that some pundits are saying will be the case in 2012. But will those forecasts stay in place, or will drama surrounding the debt ceiling negotiations or other events throw that into question by weighing on revenues or margins?

Certainly, David Bleustein, head of research at UBS Investment Research, suggests that the bulk of corporate earnings guidance in the coming weeks is likely to be negative, although perhaps less so than in recent quarters. (Companies typically use their quarterly earnings reports and the inevitable conference calls that follow to gently "guide" analysts' future profit expectations higher or lower.)

Some of the same factors that may constrain profit growth may also limit the ability of the market to deliver any expansion in the price-earnings ratio for the S&P 500 -- and thus higher share prices. Confidence remains fleeting and elusive; welcome when it appears but hard to sustain for any length of time. Nonetheless, with many blue-chip companies trading at relative discounts to their historic valuations while offering higher yields than they have in many years, investors may well opt to seize hold of any good news and respond by driving the stock prices of individual companies significantly higher. Get ready for a bumpy ride.

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

More from The Fiscal Times
2Comments
Jan 11, 2013 4:42PM
avatar
Maybe even the 1st. Quarter will be okay....Without trepidation..From DC.?
Jan 11, 2013 3:34PM
avatar

Good report. Don't think 4th quarter earnings were better than fair, but sufficient momentum to carryover to induce a good but bumpy start for 2013 with better results in 2nd. quarter after congressional tantrums subside alleviating corporate anxiety and uncertainity.

 

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

118
118 rated 1
270
270 rated 2
472
472 rated 3
714
714 rated 4
624
624 rated 5
608
608 rated 6
623
623 rated 7
445
445 rated 8
319
319 rated 9
125
125 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
BIDUBAIDU Inc10
BMYBRISTOL-MYERS SQUIBB CO.10
CELGCELGENE CORP10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.