The Great Disconnect: Awful Earnings vs.

a Hot Stock Market By Matt Nesto A week from today, when Alcoa (AA) officially kicks off third-quarter earnings season, analysts who know the company best are expecting the aluminum producer to report a penny per share in earnings on $5 ! billion in sales "hat#s down sharply from $$ %5 per share and o&er $! ' billion in re&enues that it deli&ered in the () last year *i&en that Alcoa + the smallest and second worst performing stock in the ,ow -ndustrials o&er the past year + has already been punished for its lackluster results, some might argue that it is poised for a pop "he bad news, so to speak, is already in .ut there#s only one problem/ Alcoa#s pro0ected plunge is not an island of strife, it#s part of a bigger crisis All totaled, more than 1$2 of () earnings pre-announcements ha&e been negati&e, a rate that 3eff 4leintop, chief market strategist at 565 7inancial, says is not only running at more than double the historic norm, but is a key factor in why he thinks we#re looking at the start of a 8global profit recession8 that is going to see estimates come down As we discuss in the attached &ideo, 4leintop cites three reasons why he thinks we#re about to see the worst quarter for earnings in three years 9hief among them is his call that manufacturing is stalling, despite :onday#s better-than-expected -;: :anufacturing report 8<&erywhere you look we#re seeing declines now for the first time in three or four years, back to a recession in profits,8 4leintop says, pointing out the negati&e profit outlooks that exist for markets in <urope, Asia, and the = ; >hile we ha&e gone into earnings seasons with negati&e expectations more recently, the tendency for companies to post better-than-expected results (a k a to beat the street) helped a&ert that situation in recent quarters 4leintop is also on watch for any erosion in profit margins, pointing out that 8companies ha&e already cut costs to the bone 8 As he sees it, there is a limit to the amount of time that corporate America can deli&er double-digit profit growth at a time when re&enues are barely mo&ing 7inally, 4leintop says he#s looking out for the unspoken side of share buybacks or repurchase programs ?f particular interest to him are companies and industries that are able to come through with positi&e earnings growth, &ia a few pennies of better-than-expected <6;, at a time when their net income is shrinking As he sees it, traders may be focused on policy e&ents like the easing authori@ed by the fed and <9., but 8what matters most to in&estors8 is long-term earnings growth