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Tuesday, October 8, 2013

The shutdown saga continues, threatening to overshadow the 2013 Q3 earnings season that gets underway after the close today with reports from Alcoa (
(AA - Analyst Report)) and Yum Brands ((YUM - Analyst Report)). Stocks have been under pressure because of the Washington fight, but there are no signs of anxiety as everyone expects the issue to be eventually resolved.

Alcoa’s quarterly release today is the company’s first since it was exiled from the Dow Jones Industrial Average. For a long time, they jealously guarded their first out-the-gate reporting status, even though earnings data collectors like us would count the start of each earnings season before they reported results. For the Q3 earnings season, we count the 21 S&P 500 companies with fiscal quarters ending in August that have already reported results already as part of the Q3 tally. The list of companies that have reported already includes such industry leaders like Nike (
(NKE - Analyst Report)), which incidentally replaced Alcoa in the Dow, Oracle ((ORCL - Analyst Report)), FedEx ((FDX - Analyst Report)) and others.

That said, Alcoa and Yum Brands will be the first S&P 500 companies with fiscal quarters ending in September that will report Q3 results. We will get just a trickle of earnings reports this week, but the reporting season ramps up materially next week. Let’s hope that the budget and debt ceiling issues are resolved this week, as otherwise they have the potential of overshadowing the reporting season.

Similar to what we have been witnessing over the last few quarters, estimates for Q3 fell as the quarter progressed, with the overwhelmingly negative tone of company guidance as the primary driver of estimate cuts. Total earnings for companies in the S&P 500 are expected to be up +1.1% from the same period, with the growth expectation down from +5.1% in early July. Actual results will likely be better, given management teams’ tendency to under-promise and over-deliver.

But more important than the likely Q3 earnings growth tally in the +2% to +3% range (that’s where growth was in the last few quarters) will be guidance for Q4 which will be key to setting expectations for that quarter. Current estimates for Q4 represent a material growth ramp up of almost +9%, the starting point of the long hoped-for resumption in earnings growth. Regular readers know that I have been skeptical of estimates for Q4 and beyond and expect them to come down. We will find out in the coming weeks if we will get another round of estimate cuts or something different.

Sheraz Mian
Director of Research

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