Don’t look now, but it’s earnings season again. It is being reported that an "unusually high number" of 3rd quarter earnings estimates revisions have been forthcoming from analysts over the past two weeks.
For example, Alcoa (AA), reports today after the closing bell, kicking off the "official" earnings season. With aluminum prices coming down about 12% in the past three months, AA's earnings have been chopped from $0.34 to $0.22. Now that seems reasonable that things should change as the environment changes.
But from a bigger picture perspective, earnings estimates for S&P 500 companies have been cut on average from a year-over-year increase of +17% to +12.6% as of Friday.
Again, we do understand that expectations should be kept in line with current market and economic conditions but it does seem a little late in the game. Sort of like a baseball expert cutting his view on New York Yankees wins for the year with two games left in the season.
In any event, it will have at least two impacts on market response to companies' earnings reports that we can think of: 1) the bars have been lowered, making it easier for "beats" and 2) we think the market will look even harder at forward estimates than current results vs. estimates, as they recognize that "beating" a recently revised estimate perhaps carries a little less weight. That could lead to a lot of post-earnings volatility for several companies as the market tries to sort out the real fundamental picture for the company. Just a heads-up.
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David W. (aka The Underground Trader)
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