Aluminum producer and former Dow component Alcoa Inc. (NYSE:AA) is slated to unofficially kick off fourth-quarter earnings season after the close of trading on Thursday. The company is expected to report fiscal fourth-quarter earnings of 5 cents per share on revenue of $5.43 billion, according to analysts polled by Reuters. The company posted a profit of 21 cents a share on revenue of $5.90 billion in the year-ago period. Ahead of the announcement, shares of Alcoa fell 1.71 percent to $10.65.
“Typically we’ve seen commodity prices in general been depressed in 2013,” said Adam Sarhan, founder and chief executive officer of Sarhan Capital. “Metals in general haven’t really had a lot of strong appreciation. Now aluminum demand specifically tends to be somewhat of a lagging indicator. It used to be much stronger, but now because the economy has shifted, it’s more of the services or information-based businesses that are driving the global economy, specifically the U.S. economy. Demand in other metals has taken a back seat to real economic growth.”
During the fourth quarter of 2013, the S&P 500 is forecast to increase earnings per share by 5.7 percent compared to the same period a year ago, according to S&P Capital IQ.
“Overall, the expectations are positive,” Sarhan said. “We’ve seen somewhat of a lack of earnings demand over the past few quarters. They’ve been lackluster more or less, whereas the market’s rocketed higher. Now we’re starting to see that strong stock action translate, or we’d like to see rather strong earnings growth.”
The U.S. Senate on Monday confirmed Janet Yellen as the next chairman of the Federal Reserve with a 56-26 vote, replacing Ben Bernanke, whose eight-year term as current Fed Chairman ends Jan. 31. The confirmation follows the Fed’s surprise announcement in December the central bank will scale back its $85 billion-a-month bond-buying program to $75 billion this month.
“Going forward for first-quarter earnings, it [taper] might adversely affect some of the companies, but overall, I think the taper was more of a political event as opposed to actually substance,” Sarhan said.
Federal prosecutors on Tuesday announced a $1.7 billion settlement with JPMorgan Chase & Co. (NYSE: JPM), which was hit with two felony violations of the Bank Secrecy Act in connection with the firm’s relationship with Bernard L. Madoff Investment Securities. The case involved allegations JPMorgan ignored warning signs of Bernard Madoff's infamous Ponzi scheme. JPMorgan’s settlement with the Department of Justice is the largest bank forfeiture in history to resolve anti-money laundering violations.
The investment bank is expected to report fiscal fourth-quarter earnings of $1.32 per share on revenue of $23.81 billion, according to analysts polled by Reuters. JPMorgan posted a profit of $1.39 per share on revenue of $24.38 billion a year earlier. On Thursday, shares of JPMorgan edged down 0.25 percent to $58.73 in afternoon trading.
“Overall, everything that they’re doing and other banks as well I think are positive both in the short term and long term,” Sarhan said. “What they’re doing is they’re clearing all of the guck, for a lack of a better word, from the financial aid crisis,” said Sarhan. “When they emerge on the other side of that, they’re going to emerge much leaner and much stronger than they were before, and Bank of America is the same exact situation.”
When analyzing earnings reports, Sarhan said he looks at the corporation’s expectations and how the company fairs with respect to those expectations.
“Apple Inc. (NASDAQ: AAPL) is a great example,” added Sarhan. “For years they always lowered guidance and they blew away the estimates and they blew away expectations. They did it every single quarter and sometimes the stock would actually fall after their earnings report even though they beat record profit because they lowered guidance so much. It’s a game of managing expectations.”
The S&P 500 showed signs of struggling after the Index kicked off 2014 recording three straight sessions of declines. Investors now look ahead to earnings season and Friday’s highly anticipated December employment report for clues as to when the Federal Reserve may accelerate tapering.
“What I care about more than the numbers and expectations is how does the stock react to the numbers and how does the market in general react to the numbers because that’s a real tell of what investors are doing, not what they’re saying or thinking,” said Sarhan. “So the best way for me to discern earning is to look at the stock market to see how the actual stock reacts after numbers are reported.”
Ahead on next week’s earnings calendar, investors will receive a slew of releases from the financial sector, including reports from Wells Fargo & Co. (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp. (NYSE:BAC), Citigroup Inc. (NYSE:C) and Goldman Sachs Group Inc. (NYSE:GS).
“We’re going to focus on two things. One is again that game of expectations versus what they’re able to produce, the reality. Also the second thing is the stock price,” Sarhan said. “If you look at most of the banks for the most part, since 2007 they haven’t recovered. They’re still trading way below where they were trading before the financial crisis even though the stock market, the S&P, the Dow, the major averages, are at new all-time highs. So there’s a disconnect between the financial sector within the financial stocks and how the overall market is performing. So there’s a big game of catchup that still has to come into play.”