Alcoa kicked off the quarterly earnings season on Wednesday, as it always does, and the news could be fairly described as "muddled." The aluminum giant did beat the analysts' estimate of $5.54 billion in sales by reporting third-quarter sales of $5.83 billion — but that was down from 6.43 billion in the third quarter of 2011. All told, the stock lost 13 cents a share. That's not a very impressive "beat."
Alcoa's uninspiring report could be the start of a quarter that has all the makings of, if not a bloodbath, then a serious downer for many investors. As recently as June 30, earnings for the third quarter were projected to increase by 1.9 percent, according to data compiled by FactSet. But as of the beginning of October, after guidance numbers had been issued by many companies, the collective estimated earnings are now projected at a negative 2.7 percent.
If that loss does hold true, it will break a string of eleven consecutive quarters in which earnings have grown. That's a frightening turnaround, and a broad-based one as well. Nine out of ten S&P 500 sectors have had their collective earnings projections downgraded. The only one that has kept its head above water is the financial sector.
One hundred and three corporations issued guidance numbers prior to this earnings season; 80 of those have been below the average analyst's estimate for their earnings. That leaves just 23 companies that have exceeded the analysts' estimates, which would be the smallest number on record since FactSet began recording this data back in 2006. The 78 percent of all reporting companies lowering estimates is a record, beating out the previous high of 73 percent, set in the fourth quarter of 2011.
So that's the bad news. There are other sides to this story, though, reasons to believe that even if earnings fall as much as some experts expect, it may not be the worst thing for the stocks in question. Among the mitigating circumstances:
Playing the expectations game. Companies want to downplay their earnings before their official announcements. When it comes to earnings season, the name of the game is beating expectations: In the previous quarter, 70 percent of the companies in the S&P 500 beat their earnings estimates, even though only 42 percent beat their sales estimates.
It's considered highly embarrassing to fall short of expectations: Historically, companies that have missed their earnings drop about twice as much as companies that exceed expectations gain. So nearly everyone positions themselves to beat their estimates. That's probably a big reason for the downgrade in guidance numbers that FactSet found.
