Alcoa, the largest U.S. aluminum producer, is scheduled to report after the close... Read More
The Standard & Poor’s 500 Index has climbed an average of 2.2 percent in the month before Alcoa Inc. (AA) disclosed results, according to data compiled by Bloomberg since the beginning of the bull market. Falling oil prices and concern about the stronger dollar have hurt investor confidence in recent weeks, leaving the index down 3.3 percent, the worst pre-earnings season performance since 2009.
Stocks added to losses yesterday, with the S&P 500 closing at a two-month low, as the International Monetary Fund cut its outlook for global growth and German industrial production plunged. The next month will see a flood of information for
investors to sort through, with more than 400 companies in the S&P 500 scheduled to provide a quarterly update.
“The information vacuum that occurs prior to earnings provides a nice environment for worries to fester,” Stacey Nutt, chief investment officer at ClariVest Asset Management LLC in San Diego, California, said in an interview. His firm oversees about $4 billion. “But haven’t there been all kinds of worries for the last five years? When those things actually start to impact earnings, and they may at some point, I will begin to worry.”
Stocks Tumble
The S&P 500 sank 1.5 percent to 1,935.10 yesterday. The Dow Jones Industrial Average lost 1.6 percent to 16,719.39, the biggest retreat since July 31. The Russell 2000 Index (RTY) of small companies slid 1.7 percent, bringing losses to 11 percent since a record in March.S&P 500 futures, as well as Dow and Russell 2000 contracts, were little changed at 9:20 a.m. in London today.
Selling accelerated in afternoon trading yesterday as index futures contracts expiring in December slipped below 1,940, a level where two previous declines had ended earlier in the session. Treasuries rose, with yields on 30-year notes falling to the lowest level since May 2013.
Analysts have reduced profit estimates as officials from the Federal Reserve to the IMF warned about expensive stock valuations. Earnings for S&P 500 companies probably increased 4.9 percent during the third quarter, down from an estimate of 7.8 percent in July, according to data compiled by Bloomberg.
The IMF report said yesterday that a sustained period of policy interest rates near zero in advanced economies has raised the risk that some financial markets may be overheating.
Frothy Valuations
“Downside risks related to an equity price correction in 2014 have also risen, consistent with the notion that some valuations could be frothy,” the group said without naming specific markets. Three months earlier, the Fed said prices were stretched in small social media and biotechnology companies.Alcoa, the largest U.S. aluminum producer, is scheduled to report after the close today. The New York-based company is estimated to earn 22 cents a share during the quarter, double the amount from a year ago, according to the average forecast from analysts surveyed by Bloomberg.
In the month before earnings season, the S&P 500 has advanced about 80 percent of the time, according to data compiled by Bloomberg since the start of the bull market. The worst performance among those periods was a 6.3 percent drop that began June 8, 2009.
U.S. stocks are under pressure because of weaker economic growth in Europe and concern that the stronger dollar has reduced the value of overseas profits, according to Andrew Pyle, a fund manager at ScotiaMcLeod Inc. in Peterborough, Ontario. The Bloomberg Dollar Spot Index, a measure of the currency against 10 major peers, jumped 6.7 percent in the third quarter for its biggest advance in six years.
Uncertain Market
“The mood going into this earnings season is this could be the one where we see some disappointments,” Pyle said in a phone interview. He manages about C$290 million ($259 million). “What we’re seeing in markets in the month leading up to earnings is an indication of how uncertain the market has become.”A 5 percent rise in the dollar versus the euro results in a drop of about $1 for full-year S&P 500 per-share earnings, which she projects at $118, according to an estimate from Savita Subramanian, head of U.S. equity strategy at Bank of America Corp.
The current selloff is simply a brief retreat after a long series of gains and U.S. corporate profits will be higher than most people expect, said Tom Wirth, a senior investment officer for Chemung Canal Trust Co.
Nervous Investors
“There is nervousness out there,” Wirth said in a phone interview from Elmira, New York. The firm oversees $1.9 billion. “That actually bodes well for the long-term bull market, the lack of complacency as the market continues to go up.”Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said yesterday at the Fortune’s Most Powerful Women Summit that stocks are now “in a zone of reasonableness.” With a valuation of almost 18 times earnings, the S&P 500 is at the same multiple as in October 2007, the beginning of the last bear market. Compared with the dot-com bubble, the S&P 500’s valuation is about 60 percent below the level from 1999.
While the U.S. is a bright spot in the global economy, the rest of the world is getting weaker, according to the IMF’s last report. The IMF cut its outlook on countries including Japan, Brazil and the euro area. The U.S. is predicted to grow 2.2 percent this year, compared with a 1.7 percent projection in July, the report showed.
“It’s certainly imperative that we get reasonable earnings growth here, or down the road this international slowdown could head over to the U.S. markets,” Bill Schultz, who oversees $1.2 billion as chief investment officer at McQueen, Ball & Associates in Bethlehem, Pennsylvania, said in a phone interview. “Now that earnings season is upon us, that concern has gone front and center.”
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