Manufacturing, retailing and finance companies will be up first this week as the important US second quarter profit reporting season kicks off.
Three major companies – a big commodity/manufacturing group, a big discount retailing chain and one of America’s biggest banks will reveal a lot about whether US economic activity has recovered from the slump in the economy caused by the deep winter freeze in January and February.
Aluminium producer Alcoa Inc gets the season started early Wednesday our time with results after the closing bell.
It is considered to be a bit of a guide for US manufacturing and the global commodity sector, but the problems in the global aluminium market make it a bit unreliable.
Discount chain, Family Dollar Stores Inc will report quarterly results on Thursday before the market opens (it’s also the subject of takeover speculation with hedge funds now taking a position in the shares). It has been facing higher competition from other deep discounters and from the likes of Wal-Mart.
On Friday, earnings will be released by Fastenal Co, a parts and tools supplier to the construction and manufacturing industries, which should hint at the size of the rebound from the poor first quarter.
But Thursday’s report from Wells Fargo & Co, the largest US mortgage lender, will be the most important release this week because the health of US banking remains a concern for a lot of investors, especially the so-called FICC trading revenues (Fix Interest, Commodities, Currencies).
Big US banks such as City and JPMorgan have already warned investors that their FICC trading revenues will be down on a year ago (around 15% to 20%), although the uptick in volatility in June after the rise in tensions in Iraq could see a timely rise in turnovers.
But the ban on banks trading on their own account (and against those interests of their clients, no matter the claims to the contrary) is proving to be the biggest dampener of revenue growth in the FICC areas.
Wells Fargo’s figures and outlook will also tell us if the US housing sector has picked up pace from the first quarter slowdown, as some of the official data on sales and building starts are now suggesting.
Alcoa’s result won’t tell us much because of the continued stagnation in the metal market.
But the company has been slowly raising its growth estimates for demand, supply and production as the economies of Europe recover and the outlook in China improves.
Alcoa’s result will also help the locally listed Alumina Ltd, whose share price has risen solidly in 2014 so far.
Alumina shares are up from just over $1 at the start of the year to $1.43 on Friday and a recent high of $1.54.
Reuters says that US analysts are saying second quarter earnings growth will average 6.2%, and then surge to nearly 11% in the third quarter and almost 12% in the three months to December.
But they also say the number of companies reporting better than expected second quarter revenue figures could surprise on the upside.
"Of 133 pre-announcements from S&P 500 components so far, 97 have been negative, 24 positive and 12 in line with existing forecasts," according to Thomson Reuters.
"That puts the negative-to-positive ratio at 4-to-1 for the second quarter, the lowest since the fourth quarter of 2012.
"Moreover, that compares with 5.9-to-1 in the first quarter and 5.5-to-1 a year earlier in the second quarter of 2013.Second, actual earnings growth tends to exceed forecast growth by a sizeable margin, because companies and the analysts who track them tend to underestimate profits," Reuters Thomson said.
And analysts say better than expected revenue and earnings reports for the June quarter could help push Wall Street higher in coming months after the average first half performance.
The Dow is up 3% for the year, while the S&P 500 and Nasdaq are both up 7% or more. A year ago they were up by 10% or more.
But then the smart analysts point out that the S&P 500 has a heady price-to-earnings ratio of 15.6. That’s the highest in nine years, indicating pretty full valuations at the moment.
To boost that PE ratio, US markets have to survive the actual ending of the Fed’s huge spending programs towards the end of the year and a possible upgrading of guidance on when interest rates will start rising. That could be destabilising, as could any sudden surge in interest rates.
It is possible that rises in revenues and earnings in the June quarter and then over the next six months might only the confirm current high valuations and provide no real upward momentum in share prices.
