Text size:

  • Small
  • Normal
  • Large

Earnings focus replaces cliff concerns among American investors

Worries over the fiscal cliff are set to give way to more fundamental concerns, like earnings, as the fourth-quarter reports season gets under way later this week.

American investors' worries over the fiscal cliff are set to give way to more fundamental concerns, like earnings, as the fourth-quarter reports season gets under way later this week.

Financial results, which begin after the market closes on Tuesday with aluminium company Alcoa, are expected to be only slightly better than the lacklustre figures from the third quarter. As a warning sign, analysts' current estimates are down sharply from what they were in October.

That could prompt more volatility in stocks following a week of sharp gains that put the S&P 500 index on Friday at the highest close since December 31, 2007.

Europe ranks among the chief concerns cited by companies that warned on fourth-quarter results. Uncertainty about the region and its weak economic outlook were cited by more than half of the 25 largest S&P 500 companies that issued warnings, based on a Reuters analysis.

In the most recent earnings conference calls, macroeconomic worries were cited by 10 companies, while the fiscal cliff in the United States was cited by at least nine as reasons for their earnings warnings.

"The number of things that could go wrong isn't so high, but the magnitude of how wrong they could go is what's worrisome," said Kurt Winters, a senior portfolio manager for Whitebox Mutual Funds in Minneapolis.

Negative-to-positive guidance by S&P 500 companies for the fourth quarter was 3.6 to 1, the second worst since the third quarter of 2001, according to Thomson Reuters data.

American legislators narrowly averted the fiscal cliff by coming to a last-minute agreement on a bill to avoid steep tax rises - driving the rally in stocks - but the battle over further spending cuts is expected to resume in two months.

Investors also have seen a revival of worries about Europe's sovereign debt problems, with Moody's in November downgrading France's credit rating and debt crises looming for Spain and other countries.

"You have a recession in Europe as a base case. Europe is still the biggest trading partner with a lot of US companies, and it's still a big chunk of global capital spending," said Adam Parker, the chief US equity strategist at Morgan Stanley in New York.

Among companies citing worries about Europe was eBay, whose chief financial officer, Bob Swan, spoke of "macro pressures from Europe" in the company's October earnings conference call.

One of the biggest worries voiced about earnings has been whether companies will be able to continue to boost profit growth despite relatively weak revenue growth.

S&P 500 revenue fell 0.8 per cent in the third quarter in what was the first decline since the third quarter of 2009.

Earnings estimates are slightly better in the fourth quarter, but are well off estimates from just a few months earlier. S&P 500 earnings are expected to have risen 2.8 per cent while revenue is expected to have gone up 1.9 per cent.

Back in October, earnings growth for the fourth quarter was forecast to be up 9.9 per cent.

In spite of the cautious outlooks, some analysts still see a good chance for positive earnings statements this reporting period.

"The thinking is you need top line growth for earnings to continue to expand, and we've seen the market defy that," said Mike Jackson, the founder of Denver-based investment firm T3 Equity Labs.

Based on his analysis, energy, industrials and consumer discretionary are the S&P sectors most likely to beat earnings expectations in the upcoming season, while consumer staples, materials and utilities are the least likely to beat, Mr Jackson said.

Sounding a positive note on Friday, the drugmaker Eli Lilly and Co said it expects profit this year to increase by more than Wall Street had been forecasting, primarily due to cost controls and improved productivity.

Back to the top

More articles


Editor's Picks

 The Greens, villas: Q1 no change. 3BR - Dh210-250,000. 4BR - Dh210-260,000. 5BR - Dh220-300,000. Q1 2013-Q1 2014 5% rise. Pawan Singh / The National

In pictures: Where Dubai rents have risen and fallen, Q1 2014

Find out how rental prices in the prime locations in Dubai have altered during the first three months of the year and the current rates you will pay according to data provided by Asteco.

 Above, the private pool of Ocean Heights' five-bedroom penthouse flat. Courtesy Christie’s International Real Estate

In pictures: Penthouse flat is height of Dubai luxury living

A five-bedroom penthouse in Ocean Heights in Dubai Marina is on sale for Dh25 million and comes with a private pool and an unparalleled view of Dubai.

 The cooling towers of the Temelin nuclear power plant near the Tyn nad Vltavou in Czech Republic. The country wants to continue expanding nuclear energy capacity despite cancelling a tender to build two new units. David W Cerny / Reuters

In pictures: Best business images for the week to April 17, 2014

Here are some of the best business images for the week to April 17, 2014.

 A sign points the way to an outdoor market popular with German visitors on the Polish side of the German-Polish border. Sean Gallup / Getty Images

In pictures: A decade since the European Union went east

May 1 will mark 10 years since the European Union expanded east, taking in countries like Poland, the Czech Republic and the Baltic states as new members. And though the border region between Germany and Poland is flourishing with trade and cultural exchange, the open border has also brought a sharp rise in crime.

 The Wind, Energy, Technology and Environment Exhibition takes place from April 14 to April 16. Above, the Dewa showroom during last year’s Wetex. Jaime Puebla / The National

April corporate and economic calendar for the UAE and overseas

From Cityscape to Wetex to stock-market holidays to nations reporting first-quarter GDP figures, here is our helpful calendar of April's business events in the UAE and internationally.

 Get the latest information on credit cards, bank accounts and loan products in the UAE. Mark Lennihan / AP Photo

Rates report: Latest on UAE loans, accounts and credit cards

Souqamal.com brings you the latest interest rates on banking products in the UAE.

Events

To add your event to The National listings, click here

Get the most from The National