Aluminium giant Alcoa is set to report third quarter earnings after the market close on Wednesday, marking the unofficial start to third quarter earnings season.
Expectations are for Alcoa to report earnings per share of $US0.23 on revenue of $US5.85 billion. And while Alcoa does serve as an economic bellwether due to its leadership position in the aluminium sector, earnings season will give us a wide read on the economy all the way through to about Thanksgiving.
Via FactSet, here are some key metrics to keep in mind for the S&P 500 going into third quarter earnings:
- Earnings growth for Q3 is estimated at 4.6%. The telecom sector is expected to report the highest earnings growth while consumer discretionary is the only sector expected to report year-on-year declines.
- Earnings growth expectations were revised down from 9% on June 30.
- So far, 82 S&P 500 companies have issued negative earnings per share guidance, while 27 have reported positive guidance.
- The current 12-month forward price-to-earnings ratio for the S&P 500 is 15.
- To date, 21 S&P 500 companies have reported Q3 earnings, with 16 reporting EPS that beat the average estimate, while 14 companies reported sales that beat average expectations.
In a note ahead of earnings, FactSet’s John Butters wrote that while the 4.2% downward revision in earnings expectations during the quarter was more than average over the last 1- and 5-year periods, it is less than the 10-year average of a 4.5% reduction in expectations.
Butters noted that, “The decline in the growth rate can be attributed in part to Bank of America, as analysts included the impact of the company’s settlement with the DOJ in their Q3 estimates.”
The reduction in Bank of America’s earnings expectations, to a $US0.09 loss from a prior outlook for earnings of $US0.32, has dragged down the financial sector’s expectations for earnings growth to 10.5% from 20.6%.
The healthcare sector is the only S&P 500 sector that saw earnings expectations increase during the quarter, rising to 10.6% from 9.4%.
In a note to clients on Tuesday, Morgan Stanley analyst Adam Parker wrote that he sees upside to earnings season given that companies now need to clear a lowered bar.
Parker added that, “Our confidence is bolstered that earnings season will be fine as we made it through the first six days of October without any negative pre-releases. For these companies, the market is rewarding companies that beat consensus earnings and revenue estimates and is punishing misses.”
Parker is also focused on monitoring how the recent strength in the US dollar and the drop in the price of oil is impacting earnings statements. Additionally, Parker said he will be monitoring capital spending announcements, and expects that excluding energy and utility companies, capex-to-sales levels will at most rise only modestly.
Since second quarter earnings, we’ve gotten strong readings for Q2 GDP, with the latest estimate showing GDP grew 4.6% in the second quarter, while the most recent jobs report showed that payrolls gains remain solid while the unemployment rate has dipped below 6% for the first time in more than six years.
In recent weeks, the market has seen more volatility as economic news out of Europe continues to disappoint.
The market sometimes takes a breather ahead of corporate earnings season, but for the third quarter it appears we’ll be digesting these reports amid already choppy waters.