MARKETS SPECTATOR: A curious quarter

Fourth quarter earnings in the US are historically strong but a poor lead-in and rare distractions like the fiscal cliff and Hurricane Sandy puts the form guide in question.

With volumes still relatively light and not much on the domestic or US economic calendar, all eyes will be on the start of the fourth quarter earnings season this evening, which kicks off with bellwether Alcoa.

It’s shaping up like a pretty interesting earnings season too as there are a lot of differing factors in play that may or may not impact earnings.

The fourth quarter is historically one of the strongest quarters but this season it is coming off the back of the worst quarter for corporate profits in more than three years. If that wasn’t enough, markets had the election and fiscal cliff concerns to navigate as well as the fallout from Hurricane Sandy which smashed much of the east coast.

In terms of expectations, it’s looking like the bar has been set quite low. At the beginning of the fourth quarter 2012, analysts were expecting earnings per share growth of 9.2 per cent. Now, that has been lowered dramatically and currently stands at growth of just 2.4 per cent. See what I mean by setting the bar low!

Against that backdrop, since September 30, 2012 (start of the fourth quarter) the S&P 500 is basically flat, having gained a modest 1.47 per cent. However, since the lows it is up 8 per cent, although this rebound was mainly driven by the growing optimism over the fiscal cliff situation, which ultimately proved correct.

Taking a closer look, the financial sector is tipped to show the strongest earnings growth of 15.5 per cent, but that is still 44 per cent lower than where expectations stood on September 30, 2012. However, financial names have been one of the strongest performing groups recently and in contrast to the S&P 500 are actually up 9.1 per cent since September 30, 2012. So even though we may see firms beat expectations, it could be harder for that to actually translate into share price gains.

The materials sector also warrants some attention, with expectations now for 6 per cent earnings growth versus a huge 23.9 per cent at the beginning of the fourth quarter, 2012. Over the same period, materials stocks are only up 4.9 per cent. This potentially means it may be easier for materials names to rise if results beat forecasts, especially given the huge turnaround we’ve seen in Chinese economic momentum over the quarter.

Interestingly, third quarter results showed that although EPS growth actually came in ahead of expectations, the big issue was revenue growth, which missed forecasts substantially, and also the weak outlook statements.

Once again, I think more eyes will be on overall revenue growth and whether or not is can beat the 2.1 per cent estimate. While earnings can be grown through cost cutting measures, revenue growth actually shows whether the businesses sales are growing, and is therefore a much better overall indicator.

We’ll also see a lot of focus on the outlook statements and whether or not chief executives continue to talk down prospects like they did during the third quarter of 2012.

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