Monday, October 6, 2014
With not much on the economic or earnings calendars, stocks today will likely continue to bask in the afterglow of Friday’s strong jobs report. The next major catalyst for stocks will be the Q3 earnings season, which will start taking the spotlight with Alcoa’s (AA) release after the close on Wednesday.
Positive momentum in aluminum prices have helped push Alcoa’s Q3 estimates higher, with the current 21 cents EPS estimate for the quarter up from 14 cents at the start of the period. The positive revision to Alcoa’s estimates isn’t representative of the broader market, as the overall trend in estimates has been to the downside. The current +1.5% earnings growth expected for the S&P 500 index in Q3 is down from close to +6% at the start of the quarter, with estimates for 14 of the 16 Zacks sectors going down.
This negative revisions trend isn’t unique to Q3, as we have been seeing this play out quarter after quarter for more than two years now. But this hasn’t had much negative effect on the market as a whole. Stocks had an impressive run last year and remain in positive territory this year as well, notwithstanding the choppiness of recent sessions. The supportive Fed policies no doubt have been critical, but optimism about earnings growth in the future has also been important. Unlike the flat(tish) growth expected in Q3, consensus estimates reflect a strong growth ramp up in Q4 and beyond.
Guidance on the Q3 earnings calls will determine how estimates for Q4 will hold. But if the past is any guidance, we would expect those estimates to start coming down as the reporting cycle unfolds. With QE on track to end this month and the Fed expected to change policy course sometime next year, will the coming round of negative revisions be any different than what we have been seeing in recent quarters? We don’t know the answer, but we won’t have to wait long to find out.
Sheraz Mian
Director of Research
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