Don’t Get Suckered in by Early Earnings Success

Early Earnings SuccessAs we moved into the third-quarter earnings season, there was caution. Now two weeks in, an earnings-driven sell-off has yet to happen, as the results have been largely decent so far, albeit on lowered market expectations. Wall Street downgraded its expectations for the third-quarter earnings season, in line with the lackluster gross domestic product (GDP) growth.

As I said in a recent editorial, earnings for the S&P 500 are estimated to fall 2.6% in the third-quarter earnings season, halting 11 straight months of earnings growth, according to FactSet. (Read “Be Afraid of the Third-quarter Numbers.”)

Analysts have reduced their outlook for the earnings season from the start of September and, in my view, this has helped the results of the companies that have reported. Of course, beating lower estimates is good, but you should be careful not to get overly giddy.

Alcoa Inc. (NYSE/AA), one of the world’s top aluminum makers and a good barometer for the global economy, managed to beat on a lowered expectation of breakeven for its third-quarter earnings season. While earnings beat by $0.03 per diluted share, based on Thomson Reuters estimates, the truth is that the revenue decline of six percent indicates slowing.

The banks have been a surprise this earnings season and, as I said recently, the top-performing area for earnings growth predicted for the third-quarter earnings season is the financial sector at 10.4%, according to FactSet.

Citigroup, Inc. (NYSE/C) reported $1.06 per diluted share and easily beat the consensus estimate of $0.96 per diluted share. Yet revenues grew at a tepid three percent in its third-quarter earnings season, which is not great; and with revenues estimated to contract 2.6% in 2012 and expand a mere 2.9% in 2013, I really don’t sense a strong turnaround for Citigroup. This may have also influenced its board of directors as it made a surprise announcement on Tuesday morning that CEO Vikram Pandit had resigned after nearly five years at the helm.

As far as the other big banks, JPMorgan Chase & Co. (NYSE/JPM) easily beat on revenue and earnings in its third-quarter earnings season. Wells Fargo & Company (NYSE/WFC) beat on earnings but fell slightly short of estimates despite an eight percent year-over-year increase.

The Goldman Sachs Group, Inc. (NYSE/GS) easily beat on both revenues and earnings-per-share (EPS), while also raising its dividend. The earnings of $2.85 per share blew away the estimate of $2.12. While Goldman Sachs recorded improvement across the board, the company also warned that there are still global issues.

The area that needs help is the technology sector. The NASDAQ edged lower in six straight sessions, prior to a rebound on Monday. Chipmaker Advanced Micro Devices, Inc. (NYSE/AMD) made a downward revision in its third-quarter revenues to below consensus, citing the global environment. It will be interesting to see if the issues that Advanced Micro Devices is experiencing are more company-specific or if they are sector-wide. Watch what Intel Corporation (NASDAQ/INTC) says. Based on what Intel said in September, I expect the company will blame its situation on the downfall of non-tablets.

The bottom line is that while the earnings season is decent, it’s way too early to give our approval.