While the focus is on the government shutdown and debt ceiling, I’m getting ready for the start of another earnings season, to see if America delivers. Of course, the somewhat muted gross domestic product (GDP) growth has me fully expecting to see a drag in revenues across the broad.
Alcoa Inc. (NYSE/AA) starts the third-quarter earnings season when it reports after the markets close tomorrow. The company is a pretty decent indicator for the global economy, as aluminum is used in a broad assortment of industrial and consumer applications around the world.
The company is forecasted to earn $0.06 per diluted share on revenues of $5.71 billion, down 2.1% year-over-year, according to Thomson Financial. For this reporting year, Alcoa is expected to see revenues contract 2.8%, followed by 2.8% growth in 2014. This essentially means zero growth over two years. In my books, that’s not good; this clearly indicates a global economy that’s in trouble.
I don’t even think traders are expecting some miraculous jump in revenues or earnings in the third-quarter earnings season. Wall Street has already downgraded expectations for the earnings season.
Earnings growth for the third-quarter earnings season is estimated at 3.2%, according to a FactSet report dated September 27. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, September 27, 2013; last accessed October 4, 2013.) The number is well down from the estimate of 6.5% as of June 30.
The financial sector is expected to report the top growth, while the healthcare sector is projected to report the lowest level of growth in the third-quarter earnings season. Of course, should the U.S. government shutdown continue, this could change as we move forward.
But what is interesting is that of the 108 S&P 500 companies that have issued earnings-per-share (EPS) guidance for the third-quarter earnings season, a whopping 89 companies, or 82%, offered up negative guidance. This is much higher than the five-year average of 62%, so this is concerning, as it suggests a decline in the so-called economic “recovery.”
Meanwhile, the more important revenue growth rate is projected at 2.6% in the third quarter, down from three percent as of June 30. This number appears to be in line with the country’s GDP growth, but I expect it could worsen if the shutdown and debt ceiling talks falter.
Based on these estimates, I don’t think I would be diving in and buying in this stock market right now. You need to be careful and be selective in choosing your stocks; look for situations where the growth is above average. Companies delivering better growth than their peers will be rewarded. Otherwise, I really don’t expect much more for gains in the fourth quarter, based on the current climate.
As we move forward, I would look at opportunities in China, as we have seen numerous Chinese stocks record some stellar gains over the past few months. For more coverage on Chinese stocks, read “Your Portfolio Stop Growing? Here’s Why You Really Need to Think Chinese.”