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It feels like no time at all when we were dissecting third quarter earnings and trying to work out what they could tell us about the state of the US economy. Now the start of the new season unofficially kicks off tonight when aluminium producer Alcoa reports after the closing bell. The company used to be one of the bellwethers of the US economy, but it was kicked out of the Dow Jones Industrial Average in September 2013 after fifty four years in the index. It was not alone as Hewlett-Packard and Bank of America were two other stalwarts which were removed from the iconic index. The three were replaced by Nike, Visa and Goldman Sachs.

But whatever Alcoa’s results tonight, they’re unlikely to have much effect on the wider market. Not only is the company less significant than it used to be, but investors should be well prepared for disappointment given the weakness in commodity prices and dollar strength.

In fact it seems likely that the factors which weighed on earnings last quarter should continue to do so again. The strong dollar is expected to hurt US exporters as it makes their products more expensive and therefore harder to sell abroad. In addition, there’s the problem that US multinationals have – deciding what to do with earnings made overseas. On top of this we have the decline in oil and commodity weakness which will continue to weigh on energy and mining sectors.

Last year the broader market was dominated by a relatively small number of stocks. These included Facebook (FB,) Amazon (AMZN), Netflix (NFLX) and Google (GOOG) – the so-called “FANGs”. Google is the second-largest company in the S&P 500 and was up around 43% last year. Amazon is the sixth-largest company and was up over 110% while Facebook is the eighth-largest and ended up around 35%.

But as Reuters points out: “Consumer discretionary companies, which led S&P 500 gains in 2015 and have had the second-highest average profit growth rate of any sector over the last five years, are more pessimistic than usual going into the quarter. That is despite the benefit of lower gasoline prices for consumers”. According to FactSet, amongst consumer discretionary stocks none have given positive guidance while twenty five have given some kind of warning going into this earnings season.

Now it could be that investors are primed for disappointment and so could end up being encouraged by better-than-expected results. After all, the third quarter earnings season was hardly a knock-out. Yet stocks rallied impressively and made back most of the losses resulting from China’s equity market meltdown. It could be that history will repeat itself and last week’s sell-off is soon a distant memory. However, this time round we have the serious headwind of monetary tightening from the US Federal Reserve. 

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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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