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Ahead of Wall Street - October 8, 2012

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Monday, October 8, 2012

The World Bank’s downgrade of East Asian, particularly Chinese, growth outlook will likely have a bigger play today given the absence of any significant economic release on the home front. But it’s hardly surprising given what corporate management teams have been talking about and will likely become a chorus in the third quarter earnings season that gets underway with Alcoa’s (AA - Free Report) report after the close on Tuesday. The earnings report from Yum! Brands (YUM - Free Report) around the same time as Alcoa’s release will likely shed more light on the East Asian growth question given the fast-food chain’s substantial Chinese exposure.

Stocks have pushed to new multi-year highs in recent days on the back of monetary stimulus from the Fed and other central banks. But can those gains be sustained should the corporate earnings picture turn out to be weaker than what the market is expecting at present?

The question is not so much about the earnings results for the third quarter, but the outlook for the fourth quarter and beyond. Unlike the third quarter when earnings are expected to decline for the first time in more than 10 quarters, current outlook for the fourth quarter is of a strong earnings rebound. Consensus expectations for full-year 2013 also remain quite high, with earnings growth in the low double digits. Given what we have heard recently from companies like FedEx (FDX - Free Report) , Nike (NKE - Free Report) , and others, those growth expectations appear to be on the high side and vulnerable to downward adjustments.

The market has been taking negative revisions to earnings estimates in the stride with the help of easy monetary policy. But can the trend continue once negative revisions accelerate in the coming days? Hard to tell a this stage, but we will know soon enough as the reporting season gets into high gear in the coming days.

Sheraz Mian
Director of Research

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