‘Cliff’ concerns give way to earnings focus

Investors’ “fiscal cliff” worries are likely to give way to more fundamental concerns, such as earnings, as fourth-quarter reports get under way this week. Financial results, which begin after the market closes on Tuesday with aluminium company Alcoa, are expected to be only slightly better than the third-quarter’s lackluster results. As a warning sign, analysts’ current estimates are down sharply from what they were in October.

That could set stocks up for more volatility following a week of sharp gains that put the Standard & Poor’s 500 index on Friday at the highest close since December 31, 2007. The index also registered its biggest weekly percentage gain in more than a year.

Based on a Reuters analysis, Europe ranks among the chief concerns cited by companies that warned on fourth-quarter results. Uncertainty about the region and its weak economic outlook were cited by more than half of the 25 largest S&P 500 companies that issued warnings.

In the most recent earnings conference calls, macroeconomic worries were cited by 10 companies while the US “fiscal cliff” was cited by at least nine as reasons for their earnings warnings. “The number of things that could go wrong isn’t so high, but the magnitude of how wrong they could go is what’s worrisome,” said Kurt Winters, senior portfolio manager for Whitebox Mutual Funds in Minneapolis.

Negative-to-positive guidance by S&P 500 companies for the fourth quarter was 3.6 to 1, the second-worst since the third quarter of 2001, according to Thomson Reuters data. US lawmakers narrowly averted the “fiscal cliff” by coming to a last-minute agreement on a bill to avoid steep tax increases last week - driving the rally in stocks - but the battle over additional spending cuts is expected to resume in two months.

Investors also have seen a revival of worries about Europe’s sovereign debt problems, with Moody’s in November downgrading France’s credit rating and debt crises looming for Spain and other countries. “You have a recession in Europe as a base case. Europe is still the biggest trading partner with a lot of US companies, and it’s still a big chunk of global capital spending,” said Adam Parker, chief US equity strategist at Morgan Stanley in New York.

Among companies citing worries about Europe was eBay , whose chief financial officer, Bob Swan, spoke of “macro pressures from Europe” on the company’s October earnings conference call.

REVENUE WORRIES

One of the biggest worries voiced about earnings has been whether companies will be able to continue to boost profit growth despite relatively weak revenue growth. S&P 500 revenue fell 0.8 per cent in the third quarter for the first decline since the third quarter of 2009, Thomson Reuters data showed. Earnings growth for the quarter was a paltry 0.1 per cent after briefly dipping into negative territory.

On top of that, just 40 per cent of S&P 500 companies beat revenue expectations in the third quarter, while 64.2 per cent beat earnings estimates, the Thomson Reuters data showed. For the fourth quarter, estimates are slightly better but are well off estimates from just a few months earlier. S&P 500 earnings are expected to have risen 2.8 per cent while revenue is expected to have gone up 1.9 per cent.

Reuters