What to Watch for as Alcoa Kicks Off Earnings
Bottom lines have been so sparse over the last 12 months that the trailing price-earnings (PE) ratio on the S&P 500 stands at a dizzying 75. On a forward basis, however, that comes down to less than 16. If analysts' best guesstimates are correct, stocks don't look so terribly overpriced.
But if corporate outlooks make a mockery of those Street predictions? Shares are going to look a lot more expensive in a hurry, something that hardly bodes well for equity prices.
Materials Companies Should Be Leaders
So it's fitting that Alcoa, a member of the economically ultrasensitive materials sector, should launch earnings season, considering that so much of the rally has been a giant bet on global recovery. Materials, after all, have been leading the market for much of the rally, according to Capital IQ.
That's partly because materials are expected to lead all sectors by producing year-over-year fourth-quarter earnings growth of more than 160%, according to Thomson Reuters. For the record, consumer discretionary comes in second, at 114% growth, followed by telecoms at 51%, tech at 30% and consumer staples at 3%. On the other end, the energy sector is forecast to report a 24% drop in profits, followed by industrials at minus 13%, utilities at minus 8% and health care at minus 4%. Financials are seen swinging back to the black after a year-ago loss.
At any rate, if we want a solid start to earnings season, it would really help for Alcoa to deliver on expectations, something the suddenly resurgent dollar might make hard to achieve.
That's because a weak dollar helps lift the earnings of U.S. companies that have lots of sales overseas -- companies like Alcoa. But the U.S. Dollar Index, which measures the greenback against a trade-weighted basket of six major currencies, rose 1.5% in the fourth quarter after bouncing sharply off a 52-week low notched in late November. (The dollar rallied nearly 5% in the last five weeks of 2009.)
Just Don't Miss Expectations
Citigroup (C) cited that so-called foreign exchange headwind as a partial reason for downgrading Alcoa late last week to hold from buy, saying it fears the company could actually miss Street estimates.
Woe unto materials -- and the rest of the market -- should disappointing earnings from sector bellwethers come to pass. Happily, at 1.4, the ratio of negative earnings preannouncements to positive ones stands far below its long-term average of more than 2, according to Thomson Reuters, so maybe Alcoa and its dollar-dependent ilk will be OK.
At least they better be. The same holds true every earnings season, but with the recovery so tenuous, it goes doubly so this time around. Now that the earnings turning point has arrived, investors are going to need rock-solid results and outlooks -- some good, ol' beat-and-raise quarters -- to support further share-price gains. It's high time this technicals-driven rally got some support from the fundamentals.
In other words, corporations need to show investors the money, or this rally could stall faster than a daytrader can say "profit-taking."