Q3 earnings season will officially kick off when Alcoa announces its quarterly financial results after the markets close on Tuesday.
The announcements will reveal a lot about the health of the U.S. economy as well as the global economy as a whole.
Based on some of the early reports, it looks like Q3 results are likely to come in line or slightly above expectations. These early results covered the July and August months when debt ceiling talks dominated the headlines, the US Credit rating got downgraded, and stocks got pummelled.
This earnings season, we think investors are likely to glance over Q3 results and place a greater-than-usual emphasis on outlook, especially regarding the economic outlook for both domestic and overseas markets.
Nobody needs to be reminded of all the woes Europe is facing. Expectations for the continent are pretty low as economic uncertainty remains high and countries embark on austerity. And Europe is a major importer of US goods.
But low expectations could raise the chance of upside surprises. Just last month, Nike told us that sales in Europe were flat year-over-year, which was much better than the sharp decline everyone expected.
There are a few ways to grow the top line. You can sell more products. You charge higher prices. Or you can do a combination of both. The answers to these questions give you a sense of demand for goods as well as a micro reading on inflation.
Consumer sentiment readings have been pretty depressed thanks to the weak job market and uncertain outlook for the economy. Yet hard data like retail sales have been surprisingly healthy. Ultimately, the more important thing for the economy is what consumers do, not what they say.
Much is being made about commodity price volatility. The CRB Commodity index is down 16% since its April high. Falling crude oil and copper prices could be signalling a slowing global economy.
However, this should also translate to lower costs for companies. In other words, the bottom line effect of weak revenue could be mitigated by profit margin relief from lower costs.
This might be the mother of all questions. For most international corporations, emerging markets like China have been the primary driver of growth.
The people best suited to tell us about China are probably the companies on the ground that are actually engaged in commerce.
Many companies take advanced orders to be delivered in upcoming quarters and years. Companies range from industrial equipment manufacturers to clothing makers. If orders and backlog are growing, then the outlook for business is positive.
Corporate profits have made a remarkable recovery, even as hiring has remained low. In fact, leaner operating structures due to lower head counts could partially explain the rebound in profits.
However, even in a slow growing economy, companies can only cut so much before they have to start hiring again. Hiring sparked by revenue growth would be a bullish sign for the economy.
Around half of sales by S&P 500 companies are generated overseas. And we've seen a lot of volatility in the foreign exchange markets. Recently, we've seen the US dollar rally against many major currencies, which means US goods are becoming more expensive for overseas customers.