Alcoa kicks off earnings season but the action is in bank stocks

07/08/2013 4:08 pm EST


Jim Jubak

Founder and Editor,

Earnings season for the second quarter starts officially today when Alcoa (AA) reports after the close of the New York markets.

The quarter has shaped up as a major test for U.S. stocks. Analyst estimates call for earnings growth of just 1.8% this quarter for the stocks in the Standard & Poor’s 500 stock index, according to Bloomberg. Far and away the highest expectations are for the financial sector where earnings are projected to grow by 17%. Take away that performance by financials and the picture for the rest of the S&P 500 turns negative with earnings projected to drop by 1% for the non-financial stocks in the index.

With expectations for the current quarter so low guidance for the third quarter and the rest of 2013 will be crucial for setting market direction. Right now analysts are projecting 5.5% earnings growth for the third quarter and 11.2% for the fourth quarter. Typically earnings projections fall as the quarter in question approaches so everyone is expecting that these growth rates will get trimmed.

The question, though, is by how much?

Earnings in the first quarter grew by just 1.8%. Six months before the quarter closed analysts had projected 8.7% growth for the quarter.

Earnings from Alcoa won’t move the market. The company is expected to show a continued struggle with slow demand for aluminum and global over capacity in the industry.

But Alcoa’s read on global demand for aluminum will set the tone for earnings reports to come from other commodity producers. When it reported first quarter results back in April, the company held its forecast for global demand growth in aluminum at 7% and reduced its projections for aluminum supply surplus from 535,000 metric tons in the fourth quarter of 2013 to 155,000 metric tons in the second quarter as some producers closed capacity. A reduction in either that 7% demand projection or in the gradual reduction in surplus supply in the industry would start earnings season badly for commodity stocks.

However, given the high expectations for earnings growth at financial companies, Friday’s earnings reports from JPMorgan Chase (JPM) and Wells Fargo (WFC)—both before the market opens in New York—are far and away the big earnings events of the week. The big banks are likely to report a bumper quarter on investment banking and trading fees—at least those are the expectations now. But worries focus on the second half of the year when losses in bank portfolios from rising interest rates and falling prices for fixed income assets could cut into bank capital ratios, which would reduce or eliminate releases from loan loss reserves that have powered recent quarters at banks such as Citigroup (C). In addition Wells Fargo with its huge position in the mortgage market will give investors a good look at how quickly higher interest rates are cutting into mortgage refinancings and originations.
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