Alcoa Inc (NYSE:AA) has long marked the unofficial kickoff of the earnings season as the first Dow component to report each quarter. The company is scheduled to release numbers tomorrow, and it may well set the tone for the materials sector, the index, and the overall market. In the broader market, a Bloomberg survey suggests that earnings for S&P 500 companies are expected to contract for the first time since 2009. Alcoa has some strong fundamental metrics heading into the release, but with weak sentiment for the market, and specifically for aluminum prices, caution is warranted.
The market backdrop
Johanna Bennett of Barron’s recently explained the role of the upcoming earnings season on the overall tenor of the market, and the tone that Alcoa Inc (NYSE:AA) may set:
Many strategists argue that as a stock market catalyst, earnings have taken a back seat to the accommodative Federal Reserve. But eventually, earnings will resume their role as the engine driving the stock market. And that engine needs some gas.
This remark comes even as Monsanto Company (NYSE:MON) beat on both the top and bottom lines and upped its outlook for the year; the company reported earnings of $2.73 per share against expectations of $2.58. Furthermore, the company’s heightened expectations, if met, would mark the third consecutive year in which the seed giant achieves growth above 20%. In the shadow of such a report, you can see how important Alcoa Inc (NYSE:AA) can be as an indicator.
Alcoa’s expected results
Heading into Monday’s release, the consensus EPS for Alcoa looks to be $0.11 on revenues of $5.97 billion. Referring back to the company’s most recent earnings release, we see that Alcoa is expecting solid earnings growth for 2013 in the range of 9% to 10%. The bulk of this growth is driven by China, which recently saw a 4.5% increase in the construction sub-index of Chinese PMI. That’s is a carry-through of the $150 billion in government-approved expansion projects to combat slowing GDP growth.
China is of particular importance, given that Alcoa Inc (NYSE:AA)’s own projections have it accounting for 23% of global consumption. Chinese demand will, therefore, be of particular significance and may serve as a critical indicator for investors. Any dramatic shifts in government policy relating to those critical expansion projects should be seen as a central risk factor or price driver.
Outlook and risk factors
While the company specifics are certainly of importance, drivers of the broad market may have a greater short-term impact on the stock. Earlier this week, the VIX — the market’s unofficial fear index — jumped 11%; year-to-date the VIX is down roughly 21%. As the Dow continues to dance with new record highs, a significant market correction is likely to be the most significant risk factor at present.