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Tuesday, April 10, 2012

WALL STREET >>> Critical Earnings Season Begins Tomorrow with Alcoa

A strong round of corporate earnings could help to offset last Friday's jobs disappointment


Alcoa (AA) kicks off first-quarter earnings for 2012 after tomorrow night's close. Historically, Alcoa's report has been very predictive for both corporate earnings and the subsequent price action within the equity market. While some say that too much emphasis is placed upon AA's actual report, it is undeniable that major corporate earnings numbers will have a huge impact upon the market's price action going forward.


Since the end of 2011, analysts' earnings estimates have been revised dramatically higher. Lowered expectations have given way to an increasing level of optimism, both on the macro and micro fronts. This could be a function of the increasingly positive economic data that has surfaced over the past few months. Of all the sectors within the market, financials have seen the most drastic upward revisions (currently at their highest level since 2008). Since the market bottom in March 2009, bears have held onto the mantra that the market cannot rally without participation from financials. Up until the beginning of this year, the bounce in financial stocks had been fairly modest, especially given the dramatic sell-off that they experienced during the crisis of 2008.

However, the Financial Select Sector SPDR Fund (XLF) is up dramatically this year, outpacing the S&P 500 Index (SPX) by over 7%. Since these stocks are now performing strongly, could continued outperformance by financials be the next catalyst to take us even higher?

Historically, upward earnings revisions have preceded very strong periods within equity markets, as evidenced by the accompanying Bespoke data (above charts). After last Friday's disappointing jobs number, a strong earnings season could be just what the doctor ordered to cause sideline money to come back into the market, driving it to new highs. All eyes will surely be on the upcoming data, which is now of paramount importance given the recently heightened expectations. 

Pre-market Dow Futures give a good indication of market traders expectations towards upcoming season's corporate financial reports.

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