What a jerk!

That’s what I’m betting a few of your fellow Profit Alert readers are thinking about your editor.

I don’t blame them either.

Earlier this week we detailed what to watch for in this earnings season including specific notes on Alcoa’s (AA) earnings report.

The report came in and it was, in our view, pretty bad.

Wall Street was expecting 2 cents earnings per share. Alcoa posted 7 cents due to some one-off events.

Great news right?

The market took the first big earnings report as a sign to party on and the market’s always right, no?

Well, we think there’s a big catch to this story. Something few investors understand.

Granted, it’s a finer point.

It’s a bit complicated too (we’re breaking it into two parts -- one today and second tomorrow).

But if you understand what it is and means, you can stay safe and a few steps ahead of the market in the months and years ahead.

No Mistake: This Is Bad

Let’s start by getting back to Alcoa.

Again, the net earnings were a positive surprise.

However, they could only possibly be good after considering how low expectations had fallen.

After all, the 7 cent “beat” is still a decline of 75% from the same period a year ago.

On top of that, there are a number of one-off events which made a 2 cents per share profit into 7 cents.

That’s why we’re forget about the highly malleable bottom line number and focus on the top line number.

Sales and revenues are much harder to massage and it’s where Alcoa’s report really shows us what’s happening in the world economy.

Consider this.

Last year Alcoa booked $5.82 billion revenues for the first quarter.

Last quarter it had $5.25 billion in revenues.

This quarter analysts were expecting $5.14 billion.

The final number was $4.95 billion in the most recent quarter.

A poor performance against any comparable example. It was below last year’s revenues, last quarter’s, and expectations.

On top of that, the aluminum giant also announced it would cut as many as 2,000 jobs from its total workforce of 60,000.

Just more proof of a company in a tough spot and an indication of continued stagnant economic growth.

Not. Good. At. All.

And brings us to the much bigger point.

Is A “Massive Recession” Ahead?

Alcoa shares dropped sharply following the news.

Moments after the announcement Alcoa shares were down 4% showing us earnings expectations may have been low, but still not low enough.

And history says that should be a major warning sign to all stock investors.

Just look at what happened in January.

Expectations were low at the time. Alcoa’s earnings turned out to be far lower than the diminished expectations. And shares collapsed after the report and kept falling.

It’s all part of a growing and troubling trend all investors should be watching.

As the chart below shows, earnings have been steadily falling:

Estimated Earnings Growth

The blue bars are the average quarterly earnings change for the S&P 500 companies and the grey bars are the expectations before the reports.

As you can see, earnings growth for the S&P 500 pretty much stopped at the end of 2014.

Not coincidentally, when the earnings quit going up, so did stock prices.

That’s why we’re concerned right now.

Earnings may be better than expectations, but that will only keep stocks up temporarily.

The S&P 500 companies are now entering the fifth straight quarter of earnings declines.

That’s nearly unprecedented in the last three decades.

The only time it really came close to that was during the credit crisis of 2008.

That is something that should have you worried.

The gap between earnings growth and stock prices has reached an extreme high.

Tomorrow, in the next Profit Alert Daily, we’ll go over precisely what that means for you and what to do about it now.

1 Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Post comment