If you want more evidence that the U.S. stock market is disconnected from the actual economy, you only need to look at its performance during the third-quarter earnings season.
Since earnings season began in early October, the Standard & Poor's 500 Index, Dow Jones Industrial Average, and NASDAQ Composite Index have climbed 5.7%, 5.2%, and 6.1%, respectively. The S&P has recently closed with consecutive record highs for four trading sessions and ended above the previous close on 13 of the last 17 trading sessions.
But the actual earnings results don't support this trend.Here's what's going on - and what you should do about it...
Stock Market Today: Will a Bad Earnings Season Spoil This Year's Gains?
Coming off the worst week of the year, market participants have a cautious stance in the stock market today as earnings season kicks off - and will likely disappoint.
The Dow fell 13.29 points, or 0.09%, to 14,565.25 last week. The S&P shed 15.91, or 1.01%, to end the week at 1,553.28.
Monday, guarded investors kept a wary eye on developments in Eurozone, nuclear tensions in the Korean Peninsula, and Alcoa Inc.'s (NYSE: AA) earnings after the bell-the unofficial kick-off to Q1 earnings reports.
Red flags are waving that companies will report a slowdown in corporate profits. A number of companies have delivered lower guidance, with pre-earnings announcements sloped to the negative side. Companies in the S&P are expected to increase Q1 earnings a measly 1.5% over last year, according to Thomson Reuters.
Weak earnings could push any nervous investors to take gains and bail on markets for a while.
"Right now, projections for earnings in 2013 and the market are based on optimistic assumption," Howard Silverblatt, senior index analyst with S&P Dow Jones Indices told Barron's. "We can meet estimates if things move in the right direction. But the economy does not go straight up or down. There are bumps up or down. There are bumps in the road. And investors rarely get everything they need or want."
Here are some upcoming earnings reports to watch, as well as two of the biggest deals moving stocks this week.
These U.S. Stocks on the Move After Better-than-Expected Earnings
U.S. stocks are trying to hold onto gains today (Wednesday) after another round of earnings reports and testimony by U.S. Federal Reserve Chairman Ben Bernanke.
Bernanke spoke before the House Financial Services Committee Wednesday and did not diverge from his non-committal message a day earlier on whether or not the Fed would provide more stimulus.
Economic reports today include housing starts for June, which rose 6.9% to a seasonally adjusted annual rate of 760,000 units, the highest level since October 2008. Thanks to record low interest rates, applications for mortgages rose last week as many homeowners try to refinance.
But, it was not all good news from the Commerce Department as new permits for building homes dropped 3.7% in June to a 755,000 unit pace.
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Alcoa Earnings Report Uneasy Start to Second Quarter (NYSE: AA)
Investors already have a cautious stance in the market amid growing fears about the world's biggest economies, and Monday's Alcoa (NYSE: AA) earnings report didn't help.
The aluminum producer, which always kicks off the earnings season, delivered more of a punt than a kickoff. The Dow bellwether reported an 81.3% drop in profits, as the global slowdown and production cuts weighed on profits.
Reporting after Monday's market close, Alcoa said income from continuing operations came in at $61 million, or 6 cents a share, on revenue just a hair under $6 billion. While significantly lower than the same period a year ago, the lackluster results still managed to beat Wall Street's tepid expectations (analysts were looking for 5 cents on revenue of $5.8 billion).
Chairman and CEO Klaus Kleinfeld said in a statement following the earnings release, "Alcoa maintained revenue strength amid solid liquidity by driving high profitability in our mid and downstream businesses and by reducing costs and improving performance in our upstream businesses."
Contributing to the profit decline was a global glut resulting from stagnant and slowing growth in many areas around the world, especially China.
Earnings Season Begins in the Stock Market Today
Friday's negative jobs report is hanging over the stock market today as the markets opened lower Monday morning. Investors will look to corporate earnings of major companies this week as the second-quarter earnings season unofficially begins.
Even though some major companies such as Research in Motion Ltd. (Nasdaq: RIMM) and Nike Inc. (NYSE: NKE) have recently announced earnings, Alcoa (NYSE: AA) unofficially kicks off the market's second-quarter earnings.
Investors hope that earnings do not follow the disappointing trend set by RIMM and NKE, but many other companies have already issued lower guidance for the upcoming quarter. This does not bode well for the economy which is trying to shrug off manufacturing, jobs and consumer confidence reports that all point towards "Recession 2013."
Many analysts expect earnings to be weak across the board. Corporate profits are starting to feel the sting of economic concerns overseas and at home.
Later this week JPMorgan Chase (NYSE: JPM) and Well Fargo (NYSE: WFC) report their earnings as well as Google (Nasdaq: GOOG).
Troubles in Spain continue to impact the confidence of investors as the yield on the Spanish 10-year bond crossed the 7% mark again.
Along with Alcoa here are some other companies in the news today.
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Energy and Materials Will Ride High This Earnings Season… but 2012 is Another Story
The hottest sectors for the third-quarter earnings season, Energy and Materials, should stay on their winning streak through the next quarter, but will get hit by lagging demand from emerging markets in 2012.
The two sectors will report the best results in an earnings season expected to see overall profits by companies in the Standard and Poor's 500 Index rise by 12.6%, with Energy up 43% and Materials up 32%.
Demand for both should remain strong enough in the fourth quarter to give Energy a 25% pop and Materials a 22% jump. But after that, slowing activity in emerging economies, particularly China, will take its toll.
"If you look at the last few quarters, any time companies are talking about where they're seeing the largest growth in sales and earnings, it's typically been China, India, emerging markets," John Butters, senior earnings analyst at FactSet Research Systems Inc. (NYSE: FDS), told Yahoo! Finance. He said that a slowdown in demand would have an "impact on future expectations."
Just last week the price of such commodities as oil, copper and other metals fell when China reported that its trade surplus fell to $14.5 billion in September, down from $17.7 billion in August.
"The concern is that the European debt crisis is hampering the economy in China, and possibly in broader Asia," Bart Melek, head of commodity strategy with TD Securities, told The Wall Street Journal. Investors, he said, "think demand may drop."
Meanwhile, the International Energy Agency (IEA) cut its oil demand forecasts for 2012, though the organization still sees oil demand hitting a record this year.
3Q Earnings SeasonApart from Energy and Materials, the Consumer Discretionary Sector will also do well with 16% growth in the third quarter. The laggards this quarter will be the Utilities sector, which will see earnings fall 1%, Healthcare, which will eke out 2% growth and Consumer Staples, which will see 5% growth.
Yet the overall message is a positive one.
"Overall we are seeing fairly broad-based growth across the sectors," Butters told Yahoo! Finance. "Nine of the ten sectors are expecting growth on the earnings side and all 10 sectors are expecting growth on the revenue side."
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Dropping Expectations Point to Rocky Earnings Season
With more companies issuing warnings about their results in recent weeks, investors may see more than a few disappointments in the second-quarter earnings season.
Companies faced many sources of pressure on their bottom lines over the last quarter, including persistent unemployment, the disruption of the global supply chain from the Japanese earthquake and tsunami, and high commodity and energy costs.
"This is where we can get down to the fundamentals of this market and finally see how companies are actually doing in this economy," Jack Ablin, chief investment officer at Harris Private Bank, told CNN Money.
Once-lofty expectations for the second quarter have been slipping for weeks. The Standard & Poor's 500 share-weighted earnings estimate has dropped four weeks in a row, from $232.5 billion on June 9 to $222.9 billion last week.
Of greater concern is that 84 companies - 17% of the S&P 500 - have given negative preannouncements, while just 33 have given positive preannouncements, according to Thomson Reuters data.
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The Supply Chain Strain Is Changing the Way Manufacturers Do Business
As growing demand boosts production in the second half of 2010, some companies will fail to meet output due to struggles in the supply chain.
Earnings season has shown industrial companies' surging profits in the first half of the year and increased optimism for the months to come. Emerging market strength and stable raw material prices have helped the manufacturing boost.
Industry giants like Caterpillar Inc. (NYSE: CAT) and Siemens AG (NYSE ADR: SI) all raised their outlooks and posted higher-than-expected earnings.
Siemens' second-quarter orders increased by 22% from a year ago and income rose 40% to a record high of $3 billion (2.3 billion euros). The demand increase Siemens is predicting for the rest of 2010 allowed the company to end the reduced working-hour arrangements it had set up with about 19,000 employees.
Strong Second-Quarter Earnings Can't Keep the Bears at Bay
The second-quarter earnings season has gotten off to a strong start, but it's been no match for bears who are less than thrilled with future earnings prospects.
More than half of the companies on the Standard & Poor's 500 Index have reported second-quarter earnings results. And so far, they've been strong, with two-thirds of those companies beating earnings estimates, three-fifths beating on sales and almost half beating on both earnings and sales.
As a result, the consensus second-quarter earnings per share estimate has climbed to $20.63 from $19.60 at the beginning of the month. Merrill Lynch analysts expect final second-quarter earnings per share to come in at $20.75 - a 5% sequential improvement from the first quarter.
That would be a deceleration from the 15% sequential growth seen between the fourth quarter of 2009 and the first quarter of 2010, but it's good growth nonetheless. In fact, it puts 2010 S&P 500 earnings at about $83 per share. And at current prices, that gives the market a price-to-earnings multiple of just 13.3-times - below the long-term historical average of 15.
Why Upbeat Earnings Reports Mean Caution to Investors
While earnings reports continue to pour out each day, investors should be careful before being excitedly swayed by strong financials - there is much more of the big picture to consider.
Stocks failed to get traction in the middle of last week after Alcoa (NYSE: AA) and Intel (Nasdaq: INTC) earnings reports underwhelmed investors, and Friday they spun off the road. The culprit: Fears that recent earnings gains represented a peak, and that weak readings on the economy were more representative of current conditions.
Retail sales disappointed and the Federal Reserve cut its 2010 growth forecast. Even word that Singapore grew at a record pace of 19.3% in the second quarter couldn't lift the air of despondency on Wall Street.
To read why there's a cloud over Wall Street, click here.