Aluminum giant Alcoa (NYSE:AA) got the first-quarter earnings season off to an optimistic start, beating on the bottom line and maintaining its demand outlook even as revenue missed Wall Street estimates.
True, it was by no means a blowout quarter, but Alcoa did exceed Wall Street’s average earnings estimate by 3 cents a share. Furthermore, the company reiterated its forecast for global aluminum demand to increase 7% this year.
And, let’s face it, the market’s going to need a bunch of beat-and-maintain-or-raise reports to keep hopes of a second-half acceleration in earnings alive.
After all, it’s no secret that first-quarter corporate earnings are forecast to be a dud, with companies in the S&P 500 expected to post an aggregate year-over-year drop in profits for the second time in the past three reporting periods. Indeed, analysts expect S&P 500 earnings to slip 0.7% in the first quarter.
Of course, at the same time, Wall Street forecasts are almost always too low, with anywhere from 65% to 70% of companies beating estimates. So, if enough companies can beat by as much as Alcoa did, that year-over-year decline will swing to a gain.
And as for what Alcoa’s earnings tell us about the global economy? Not much — or at least nothing we didn’t already know.
With much of Europe in recession, or darn close, and slower growth from the big emerging markets of China, India and Brazil, it’s not news that aluminum prices are still under pressure from soft demand, even as Alcoa itself has been trying to lessen the global glut by cutting its own production.
As such, Alcoa hasn’t been a global economic bellwether for a few years now.
However, it turns out that Alcoa’s earnings are something of a bellwether for the direction of the stock market, at least until the next time it reports results.
John Butters, senior earnings analyst at FactSet, notes that during the past 10 years, Alcoa has beaten Street estimates 50% of the time, or 20 out of 40 quarters. In the 20 quarters that it exceeded forecasts, the market has gone on to post gains over the next three months 80% of the time. But when Alcoa missed estimates, the market rose over the next three months only 45% of the time.
Have a look at the chart, courtesy of FactSet, below:
Given that decade of history, Alcoa did its part getting the reporting season off to a good start.
Now we just have to hope the other 499 companies in the S&P 500 don’t screw it up.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.