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Does Alcoa set the tone for earnings season?

Oct 5, 2012

Alcoa_Earnings (Oct 5 12).pngThe upcoming week marks the start of the Q3 2012 earnings season, as Alcoa is scheduled to report earnings on October 9. Do the results from Alcoa have any predictive value on the remainder of the earnings season? In terms of performance relative to estimates, about the same percentage of companies in the S&P 500 reported EPS above estimates in recent quarters whether Alcoa reported earnings above estimates or below estimates to start earnings season. In terms of price change over the last ten years, the S&P 500 has risen about 80% of the time during the next three months following an upside earnings surprise from Alcoa. Following a downside earnings surprise, however, the price of the S&P 500 has moved up almost as often as it has moved down over the following three months.

Coming into earnings season, a high number of companies have lowered expectations for the quarter. In terms of guidance, 80 companies in the S&P 500 have issued negative EPS preannouncements to date while just 23 companies have issued positive EPS preannouncements. If 78% (80 out 103) is the final percentage of companies issuing negative guidance for a quarter, it will be the highest percentage for a quarter tracked by FactSet.

The estimated earnings growth rate for Q3 2012 was unchanged this week at -2.7%. Upward revisions to estimates for companies in the Energy sector (including Exxon Mobil and Chevron) were offset by small downward revisions to estimates for companies in most of the other sectors. Since the start of the quarter, nine of the ten sectors have recorded a decline in expected earnings growth, led by the Materials and Information Technology sectors. The only sector that has seen an improvement in expected earnings growth is the Financials sector.

If the final earnings growth rate is -2.7%, it will mark the end of the streak of consecutive quarters of earnings growth for the index at eleven. Five of the ten sectors are predicted to report a decline in earnings growth for the quarter, led by the Materials (-21.9%) and Energy (-20.4%) sectors. Although eight of the ten sectors are predicted to report revenue growth for the quarter, the estimated sales growth rate for the index is 0.0%. The Energy (-16.4%) and Materials (-4.6%) sectors are the only two sectors with projected sales decreases. Slower economic growth in Europe and emerging markets countries (China) and less favorable foreign-exchange rates will have a negative impact on both top-line and bottom-line growth for many companies in the index in the third quarter.

Aside from Alcoa, just one other Dow component (JPMorgan Chase) and eight other S&P 500 companies are scheduled to release earnings results during the week. The peak weeks of the earnings season will begin the week of October 15.

Read more about the earnings trends of the S&P 500 in this week's edition of FactSet Earnings Insight. Visit www.factset.com/earningsinsight to launch the latest report. 

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