MARKETS SPECTATOR: Will Alcoa pass the bellwether test?

While US aluminium giant Alcoa has reported a decline in revenue, history suggests the fact it outperformed expectations could actually translate to more upside surprises for markets.

Alcoa has long been seen as a bellwether for the US economy as few companies can report on a more diverse array of products and sectors than the biggest producer of fabricated aluminium. Its products are critical to construction, packaging and transportation.

So, the US third quarter earnings season is officially underway thanks to Alcoa’s aftermarket release yesterday morning, Australian time. And the result wasn’t so bad after all.

In fact, excluding one-off items its third quarter result actually came in ahead of expectations, which could be a good omen for the remainder of corporate earnings. The aluminium giant posted earnings of three cents per share, topping street expectations of zero cents, according to FactSet. Revenue also topped forecasts, only declining to $US5.8 billion versus an anticipated $US5.54 billion.

Despite the low bar forecasts, it wasn’t enough to keep the sellers at bay with the stock losing 4.6 per cent despite initially rising in after hours trade.

However, not all is lost. Whilst this might not be a good sign for the state of the economy, on the occasions when Alcoa beats expectations the market tends to outperform.


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Source – FactSet estimates

As you can see above, when Alcoa beats estimates the S&P 500 rose 15 out of 19 quarters thereafter. However, when it missed estimates it only fell in 11 out of 21 quarters, indicating that an Alcoa beat is a much more accurate predictor of S&P 500 performance over the following quarter.

With Alcoa’s result in mind, as well as the long history of Wall Street underestimating expectations, we’re happy to bet on further upside surprises due to lowball forecasts which should see the S&P 500 higher over the quarter.

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