Why Earnings Season Is Off to a Positive Start


Stocks are higher today as fourth-quarter earnings season appears to be off to an auspicious start. At nearly the halfway point in trading, the Dow Jones Industrial Average is higher by 72 points, or 0.54%.

Alcoa's earnings: Just good enough
Aluminum giant Alcoa unofficially kicked things off yesterday after the market closed. The company reported a profit of $0.21 per share in the fourth quarter fueled by stabilizing aluminum prices, higher sales in its aerospace unit, and aggressive expense reduction. In the same quarter of 2011, Alcoa lost $0.18 per share.

According to CEO Klaus Kleinfeld: "Alcoa hit record profitability in our mid and downstream businesses, and continued to drive efficiency in our upstream businesses in the fourth quarter, all while cutting debt and maintaining our cash position. We overcame volatile metal prices and global economic instability to deliver on our targets for the fourth year in a row. We enter 2013 in a strong position to maximize profitable growth."

Going forward, the company sees global aluminum demand growth of 7% for 2013. This is up from the 6% growth last year and, according to the company, is "ahead of the 6.5% rate required to meet [Alcoa's] forecast of a doubling of aluminum demand between 2010 and 2020."

On the heels of this news, Alcoa's shares started the day out significantly higher, but have since oscillated between positive and negative territory.

Why Alcoa's earnings matter
Alcoa is the first Dow company to report earnings each quarter and, given the fact that it's the world's largest aluminum producer, its results are potentially a harbinger of things to come. Not to mention, traders are a typically suspicious lot, constantly seeking to ferret out trends and patterns in data.

With this in mind, many believe that the performance of Alcoa's shares on the first day after it reports earnings is indicative of the near-term future direction of the market. According to Schaeffer's Investment Research, as cited by The Wall Street Journal, over the last seven years, when Alcoa's shares increased on the day after its earnings release, the S&P 500 has averaged a 1.9% gain over the following month and a 3.2% gain over the following three months. As an analyst at Schaeffer's noted: "This is one of those fun stats that has, for whatever reason, shown fairly decent predictive ability."

The next big company to report earnings this week is Wells Fargo , which is on tap for Friday. As with Alcoa, because Wells Fargo is the first major bank to report, many expect it to foretell results at other large lenders like Bank of America and JPMorgan Chase , both of which report next week.

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The article Why Earnings Season Is Off to a Positive Start originally appeared on Fool.com.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Wells Fargo & Company. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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