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Alcoa Earnings Matter More Than You Think


Every three months, the smallest and least consequential member of the world's most elite stock grouping is showered with disproportionate attention when its quarterly earnings come out. I am referring, of course, to Alcoa (AA) and the upcoming release of its first quarter results. Because of its unique position as one of only thirty companies that make up the Dow Jones Industrial Average, Alcoa gets a degree of contemplation that comparably-sized $8.5 billion businesses such as Whirlpool (WHR), Juniper (JNPR) or Tiffany (TIF) simply don't.

As my co-host Jeff Macke and I discuss in the attached video, Alcoa's role heralding the impending stream of financial reports we collectively call earnings season is not so much about its relatively minuscule impact on the capital markets, but rather upon the fact that it is first.

To that point, FactSet earnings analyst John Butters looked for correlation between Alcoa's results and the subsequent performance of the markets, as well as the degree of earnings season surprises (or disappointments) and found "little predictive value" to crow about.

Simply put, As Goes Alcoa, So Goes the Market just isn't applicable.

What Butters does highlight is the fact that expectations for Alcoa, and the entire Materials sector, have come way down over the past 90-days, at exactly the same time that stocks have touched all-time highs.

For the record, the leading U.S. producer of aluminum is now forecast to earn $0.08 per share this quarter, down from an expectation of $0.13 on December 31st, FactSet data shows. Alcoa's stock is down about 10% in 3 months versus a comparable gain for the Dow.

If you're not long Alcoa or lack enthusiasm about its business, there are other issues to watch that may be relevant to the masses. One in particular is whether Alcoa's short-term winning streak can be extended now that it has met-or-beaten earnings and sales estimates for four straight quarters.

Also worth parsing is language. I already have a list of key headings under which I plan to tally excuses; including fiscal cliff, tax increases, housing recovery, Euro crisis and an unseasonably cold springtime. There are sure to be others, but these ought to be prominently featured.

And finally, perhaps most importantly of all, we will need to see if the outsized degree of negative/pessimistic guidance slows for the 2nd half of the year. FactSet's Butters says 72% of forecasts for this quarter were negative and with S&P 500 earnings growth of 10% and 16% targeted for the 3rd and 4th quarters respectively, we could very well see those numbers getting hauled back down to earth too.