An Early Look at the Fourth-Quarter Earnings Season

Fresh off the holidays, investors are slowly turning their attention to the fourth-quarter earnings season, which starts tonight after the closing bell when Alcoa (NYSE: AA), in its unofficial position as the first company to report, releases its latest results. Because aluminum is widely used in manufacturing, many investors see the leading producer’s earnings as an indication of what’s to come.

Whether Alcoa is, in fact, a bellwether is debatable, however, particularly in recent years. According to an October article in the International Business Times, during periods when Alcoa missed the consensus forecast, S&P 500 companies still went on to beat expectations 72.4% of the time.

Still, the aluminum giant’s results do have an impact on investor sentiment. Right now, analysts expect Alcoa to report fourth-quarter revenue of $5.61 billion, down 6% from a year ago. Earnings, however, are expected to come in at $0.06 a share, up from a loss of $0.03.

Uncertainty Is Weighing on Expectations for the Fourth-Quarter Earnings Season

Overall, expectations remain modest, with the S&P 500 expected to post just 2.4% earnings growth in the fourth quarter from a year ago. That’s down from a 9.2% forecast growth rate back on September 30. Revenue is forecast to rise 2.1%, again down from a higher expectation of 2.7% at the end of September.

Analysts will be watching for the impact of three key events that transpired during the quarter. Two can be linked to happenings in Washington: the re-election of President Obama and whether the fiscal cliff debate prompted businesses and consumers—wary of higher taxes and the possibility of a tumble back into recession—to hold off on big purchases. The other wildcard is Superstorm Sandy, which caused heavy damage along the east coast.

Financials Are Set to Shine During the Fourth-Quarter Earnings Season

Of all 10 sectors in the S&P 500 index, financials are expected to post the strongest results during the fourth-quarter earnings season, with 15.5% earnings growth, according to a recent report from FactSet analyst John Butters. In addition, the sector’s revenue is expected to rise 7.0%—the first gain in the past several quarters.

The first big financial firm to report is Wells Fargo & Co. (NYSE: WFC), which puts out its results before the opening bell on Friday. However, the big push comes next week, with earnings from Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C) and Goldman Sachs (NYSE: GS).

All five have posted strong gains in the past year as the quality of their loan portfolios continues to improve and demand for new loans rises, particularly for mortgages and business loans. Although, as CNBC’s Bob Pisani points out, many banks are now trading near their four-year highs, so any disappointments could lead to a big fall.

One big drag on the sector is the insurance business, which dealt with huge claims due to Superstorm Sandy. Without insurance, writes Butters, overall expected earnings growth in the finance sector jumps to 43%.

On the other side of the coin, industrial, information technology and health care companies are forecast to report lower earnings than a year ago. On the tech side, declines are expected in the semiconductor, office electronics and computer businesses. In his report, Butters also points out that earnings from Apple (NasdaqGS: AAPL) are forecast at $13.44 a share, down from $13.87 a year ago. If that comes to pass, it would mark the first time the maker of the iPhone and iPad has reported lower earnings in the past nine years.

Three Big Trends to Watch for in the Months Ahead

Beyond the fourth-quarter earnings season, Investing Daily editors have recently spotlighted a number of key trends that could move markets as we move further into 2013. Here are three:

1. Fiscal cliff deal helps remove some uncertainty: Even though the deal to avoid the fiscal cliff resulted in higher taxes for some—and the debate over spending cuts is far from over—it does bring some clarity to the taxation environment. Investing Daily’s Roger Conrad recently pointed out how effective that can be at spurring business investment in “Corporate America’s Cash Mountain.”

“For those whose memories need refreshing, in 1993 President Bill Clinton pushed an extremely controversial budget through Congress without a single Republican vote. Clinton’s package relied heavily on tax increases, never popular with corporate America or Republicans. But more important, it did eliminate uncertainty on future taxes and spending that had kept corporations from investing cash in their businesses.

“If nothing else, Clinton’s budget set clear rules management could plan around. The details weren’t what many would have preferred. But investment did rebound and the result was a long period of economic growth and stock market gains.”

2. IT investments set to rise: As Investing Daily and Personal Finance managing director John Persinos recently wrote in “Apocalypse: Not Now,” U.S. companies have already earmarked some of their collective cash stockpile—estimated at around $1.5 trillion—for long-deferred IT investments. That’s a longer-term plus for companies like Cisco Systems (NasdaqGS: CSCO), Intel (NasdaqGS: INTC) and Qualcomm (NasdaqGS: QCOM).

3. A continued housing rebound: As we pointed out on December 19, housing market indicators continue to show strong growth, with the latest good news being the National Association of Home Builders/Wells Fargo Housing Market Index coming in at 47 for the month of December. That’s the eighth consecutive month of gains for the HMI, which tracks homebuilder sentiment.

There are lots of ways for investors to profit from the housing market rebound. For example, you could buy shares of builders like Lennar Corp. (NYSE: LEN) or niche players like Stewart Information Services (NYSE: STC), which sells title insurance. You could also look to ETFs like the SPDR S&P Homebuilders ETF (NYSE: XHB), which holds stocks from across the industry.

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