Alcoa to kick off downbeat round of earnings reports
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MarketWatch
9:59 p.m. 01/08/2008 By Laura Mandaro
SAN FRANCISCO (MarketWatch) -- Get ready for a roller-coaster of an earnings season.
Aluminum-maker Alcoa, Inc. (AA) marks the unofficial start Wednesday afternoon with an expected fourth-quarter profit drop of 55% from the prior year's profits per share, excluding restructuring charges. This decline is expected to headline a 9.8% drop in aggregate earnings for S&P 500 (SPX) companies.
In fact, the index of large U.S. companies is on track for its second straight quarterly decline in earnings - the first back-to-back drops since the fourth quarter of 2001 and the first quarter of 2002, according to Thomson Financial.
"We're looking for another pretty bad quarter," said Alec Young, equity strategist at Standard & Poor's Equity Research.
In a repeat performance of the third quarter, financial companies are shouldering the blame. Thanks to big write-downs expected at major banks such as Merrill Lynch & Co. (MER), Citigroup (C) and Bank of America (BAC), financial companies are slated to post a 67% drop in quarterly profit, according to an analyst poll by Thomson Financial. As the largest group by market capitalization and in most quarters, earnings, financial companies have an outsized impact on the group's performance. Their losses also dragged down third-quarter earnings.
"Most sectors are going to be in the black," predicts Young. "But because financials are likely to do so badly and they're so big, we're looking for a weak quarter overall."
If financials earnings were stripped out, S&P 500 profits would rise 12%, predicts the Thomson poll.
Profit pain clustered in financials would probably be just fine for the market, says Linda Duessel, equity market strategist and senior vice president at Federated Investors. Investors have already absorbed warnings on subprime losses. The worry general economic slowing is beginning to hamper other sectors.
"There is increasing concern, particularly with Friday's report [on December payrolls] that the weakness is spreading to the rest of the economy," Duessel said.
Fear of potential bad news from companies as they report profits is partly behind the market's downward start to the year, she and others say. Since the start of the year, the Dow Jones Industrial Average has lost nearly 676 points, making the first five trading days of the year the worst in point terms ever. Its 5% drop is the worst since 1978.
Following Friday's report on December jobs, the upcoming round of earnings reports "is definitely the next catalyst to the market," Duessel said.
What companies say about 2008 earnings, which analysts expect to rebound, will be key.
"If the outlook of companies across many industries is not positive or it's uncertain, we need to worry about lay-offs," she said.
On Friday, the Labor Department said the unemployment rate shot up to 5% in December as job growth stalled.
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