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Alcoa (NYSE: AA) Kicks Off First Quarter Earnings Reports That Could Put Brakes on Market Rise

Investors will get a front row preview to the first quarter earnings season when bellwether Alcoa Inc. (NYSE: AA) reports its results Tuesday after the close.

The aluminum producer is the first major U.S. company to release its first quarter earnings report, and these closely watched results often set the tone for the earnings season.

But investors shouldn't get their hopes up – expectations for first quarter earnings are low.

Earnings growth for the first three months of 2012 was lackluster at best – even though the stock market produced some of the best quarterly market gains since 1998. The Dow rose some 8%, the Standard & Poor's 500 Index gained 12%, and the NASDAQ nearly climbed a whopping 19%.

If this latest batch of earnings comes with a plethora of nasty and unwelcome surprises, the recent market rally could be derailed.

Sam Stovall, chief equity strategist at S&P Capital told the Associated Press, "It's supposed to be a very weak quarter, but Wall Street is freaking out because they don't understand why."

Why First Quarter Earnings
Will Fail to Impress

Analysts are expecting earnings for S&P 500 Index companies to decline 0.1% compared to the same period a year ago, according to FactSet. While a minuscule number, it marks a major turning point.

Earnings growth was on a tear for the last nine quarters. Year-over-year earnings growth has been at least 10% for all but the most recent period, when it was 6%.

Reasons for the expected slowdown in the first quarter of 2012 include:

  • A slowdown in stalwart China.
  • Rising oil prices.
  • The ongoing Eurozone sovereign debt crisis.
  • And hard to beat double-digit growth in previous quarters.

The deceleration in earnings growth is a bleak reminder that the economy's recovery is still being hampered and is slow going among most sectors. Three months ago, when things appeared a bit rosier, analysts forecast earnings growth for the first quarter at 3%.

The slide in corporate earnings follows a stellar and extended period of sizable gains.

In 2011's first quarter, earnings soared 19%. That was on top of the 53% growth in the previous year as companies regained momentum from a very gloomy first quarter.

That is one tough act to follow.

Lawrence Creatura, a portfolio manager at Federated Investors told The New York Times, "You still have growth, but at a slower pace."

Just three of the 10 sectors in the S&P 500 Index are expected to show earnings growth in the first quarter. They include industrial, technology and consumer staples companies. The energy industry is predicted to show flat earnings results.

Meanwhile, of the remaining six, marketing and telecommunications are expected to show the biggest drops, hurt by a worldwide slowdown, according to a survey conducted by Thomas Reuters.

How Markets Will React to First Quarter Earnings

Why do the markets care about earnings so much? Well for one thing, earnings matter.

More often than not a company's stock movement is directly correlated with its earnings, moving in the same direction. Market participants frequently trade on what they anticipate for the stock in the months ahead.

Sometimes, after much discussion and activity, a company's earnings are already reflected in a stock's price. Other times, especially in light of big revelations, a company's share price can be very adversely affected.

But, despite all the clamoring about the end of earnings growth, analysts are expecting only a short-term decline. By the second quarter, earnings growth is projected to return to 7%, and 5% growth is anticipated for the third quarter, according to FactSet.

Alcoa is expected to report a loss of 4 cents a share when it reports after the close Tuesday.

On Friday, the market gets numbers before the opening bell from JPMorgan Chase & Co., (NYSE: JPM), forecast to report $1.15 a share, and Wells Fargo (NYSE: WFC), predicted to weigh in with earnings of 72 cents a share.

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