November 19, 2012
They say that hindsight is 20-20, but in the case of the third-quarter earnings season, analysts did make some pretty accurate guesses about how Wall Street would fare. Right before the announcements started coming out, analysts forecast that S&P 500 company's profits would contract 2.3% compared with the same quarter last year. As of last Friday, the average S&P 500's company earnings declined 2.2% for the third quarter.
Alcoa Inc. (AA) kicked off earnings season by reporting a $143 million net loss; nonetheless, the company's $0.03 adjusted earnings did top the $0.00 consensus estimate. However, looking ahead it may be challenging for Alcoa to meet estimates—the aluminum maker also announced that it was cutting its forecast for global demand from 7% to 6%.
And Alcoa's earnings announcement set the standard. Of all of the S&P 500 companies that have announced earnings, 64% exceed analysts' earnings estimates but only 38% topped consensus sales estimates.
Of course certain sectors did better than others. Last quarter brought surprisingly strong results from the financial sector, with estimate-topping reports from JP Morgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC). Meanwhile, Basic Materials was decidedly the weakest sector, with the average company posting a 20% decline in earnings.
The mixed earnings results kept investors on their toes and cultivated an atmosphere of uncertainty—even counting today's rally, the S&P has retreated 4% since October 10 (the official start to earnings season).
But I'm not going to sit here and tell you that the lukewarm earnings season is a sign of more bad times to come. The good news is that most companies remain optimistic about their fourth-quarter prospects and beyond. The average S&P company is headed towards 11% bottom-line growth this quarter, 7% growth this year and 13% growth next year.
For many sectors, the upcoming quarters should bring a reversal in fortunes. As for the high-flying financial sector, the growth is expected to be short-lived as the sector is headed towards a 94% drop in earnings this quarter and a 93% drop next quarter. Meanwhile, Basic Materials is expected to grow earnings by 13% this quarter and 32% next quarter. So my advice is that you keep a close eye on the analyst commentary on each of your holdings and be prepared for quick revisions.
Now that earnings season is behind us, we have just a few days until the holidays start with Thanksgiving. I've said it before (and I'll say it again), but this is my favorite time of year, and not just for the food, friends and family. The holidays tend to lift spirits on Wall Street and year-end pension funding helps keep liquidity high. Just today, the indices gained in the neighborhood of 2%, and I'm guessing that we'll see at least a few more days like this before year's end.