Get Ready For A Bumpy Ride…
Investors will be turning their attention to corporate bottom lines this week as third quarter earnings season kicks off. Unfortunately, it looks like the market will be in for a bumpy ride.
According to the Financial Times, analysts are expecting “one of the worst quarterly earnings seasons since late 2009.” In fact, those who forecast earnings for a living say profit growth will decline for the first time after 11 straight quarterly increases.
With the S&P 500 index up more than 15% for the year, many are concerned that a less than stellar start to the earnings season will ignite a market downturn this week.
However, that may not be the case. There’s a good chance the market ends up finishing the week in the black.
Let’s take a look at what’s on tap…
As usual, Alcoa (AA) will get the ball rolling with their quarterly report after the market’s close on Tuesday. Alas, Alcoa’s numbers aren’t likely to provide any kind of boost to market indices.
Analysts are expecting the aluminum producer to report a meager profit of just a penny a share. If that happens, it will be a monster 93% year-over-year decline from the year ago quarter.
The gloomy outlook is based on several negative industry trends seen during the quarter… rising production costs, a global oversupply of aluminum, and sluggish demand for the metal. As a leading global producer, Alcoa will most likely be impacted by these trends.
Of course, Alcoa’s earnings are often viewed as a barometer for the entire earnings season.
In other words, poor results from Alcoa could heighten fears that third quarter earnings overall will be even worse than expected. And, this kind of downbeat sentiment could easily send the market tumbling lower.
But the news shouldn’t be all bad on Tuesday.
Yum! Brands (YUM) is scheduled to report earnings of $0.97 per share for a year-over-year gain of 17%.
The owner of the Taco Bell, Kentucky Fried Chicken, and Pizza Hut chains is expected to benefit from a return to strong demand in China. After a rare second quarter profit decline in China, YUM predicted a return to double-digit earnings growth in the second half of the year.
What’s more, demand for the company’s fast-food products in the US should have remained strong. Last quarter, profits from the company’s US restaurants jumped 26% on stronger sales across the board.
If YUM does indeed announce good results Tuesday evening, we could see the market gather positive momentum on Wednesday.
That’s the day Costco (COST) will report its numbers for the September quarter. Analysts are forecasting a 21% surge in earnings to $1.31 per share on a 12.5% rise in revenue to $31.7 billion.
Should these projections prove accurate, it will be the fourth straight quarterly earnings increase for the warehouse club operator. And it will continue a pattern of positive earnings growth that began two years ago.
Strong numbers from Costco, however, wouldn’t necessarily have a positive impact on the market.
Remember, Costco is a place where consumers go to get big discounts on food and merchandise. A robust quarter could be interpreted as a sign consumers are still too worried about the economy to increase spending anytime soon.
Nevertheless, even if the market does have a tough week, we could see its fortunes change going into the weekend.
On Friday, we’ll get our first look at earnings from a major bank. Wells Fargo (WFC) is scheduled to report before the market open on Friday.
The good news is that financial firms are expected to post better quarterly earnings growth than most industries. According to Factset, the financial sector should post an earnings gain of 10%.
And WFC is projected to be one of the better performers…
Analysts are expecting Wells Fargo’s earnings to jump 20% in the second quarter to $0.87 per share. They see the bank benefiting from the Fed’s stimulus efforts as well as an upturn in the housing market.
Now, a strong third quarter showing by the financial sector could be just the thing to ease investor anxiety.
The sector has still not fully recovered from the 2008 financial crisis. And good numbers would be a sign that efforts to heal this critical economic sector are starting to pay off.
Bottom line…
A rough start to the third quarter earnings season with disappointing numbers from Alcoa could send the market lower early in the week. But strong profit gains from YUM and COST could get the market moving higher by mid-week. And if WFC is able to deliver on analysts’ bullish expectations, we could see the market rally going into the weekend.
Profitably Yours,
Robert Morris
Category: Stocks
