North American stock markets will take their cue from the start of what is expected to be a positive first-quarter earnings reporting season this week, despite currency concerns on both sides of the border.
“We’re optimistic that we’re going to see continued strong and positive earnings growth,” said Jennifer Dowty, portfolio manager at MFC Global Management.
“I guess the reason why we are optimistic for the quarter is that, for one thing, analyst forecasts have been rather conservative, as has management guidance as well. There have been fewer negative pre announcements which is a positive.”
Aluminum giant Alcoa Inc. (NYSE:AA) kicks off earnings Monday after the market close.
Later in the week, American bellwether companies including railway CSX Corp., chipmakers Intel Corp. (Nasdaq:INTC) and Advanced Micro Devices, JPMorgan Chase & Co. and Bank of America, Yum Brands Inc. and Internet giant Google Inc. (Nasdaq:GOOG) also release their financial results.
Industrial giant General Electric Co. (NYSE:GE) and newspaper publisher Gannett Co., two companies tied closely to the health of the American economy, will also report earnings.
Canadian companies will begin their earnings reports in late April.
Analysts expect Alcoa, which traditionally kicks off the quarterly earnings season, to post a first-quarter profit of 10 cents per share, which would be a big improvement from a loss of 59 cents per share a year ago.
However, there are concerns that weak aluminum prices could result in a weakened outlook and on Friday. J.P. Morgan downgraded Alcoa’s investment rating to “neutral” from “overweight.”
More typically, there is an expectation that results will look good because of the year over year comparisons with the same time in 2009.
“We’re comparing ourselves to what some would consider to be the depth of the recession from last year and therefore when you look at the year over year earnings comparisons, they should be good,” said Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont.
As in the fourth quarter, investors will be particularly anxious to see how companies are earning their profits.
Many companies beat expectations, but that came largely from cost cutting. Investors are now a lot more anxious to see gains come from higher sales.
However, the tone of economic reports have brightened this year, showing a strengthening U.S. manufacturing sector, improving consumer confidence and even modest employment growth and that should translate into better revenue numbers.
“We’re now getting into a period where the top-line numbers are starting to gel a bit more and I think that there will be more attention on that,” said Pyle.
“So perhaps analysts and investors are expecting more top-line growth and performance but I think that the topline is there.”
Canadian corporate earnings tend to lag American reports by about three weeks. Pyle said he is hopeful about profits and revenues in Canada but, like the U.S., the currency could have a role to play in results.
The loonie returned to parity levels with the greenback during the past week for the first time since July 2008 “and when you’re an exporter and or if you haven’t hedged appropriately, it’s an issue,” said Pyle.
On the bright side, Pyle is getting the impression that Canadian companies are better able to deal with a higher currency than when the loonie hit parity with the greenback in September 2007 for the first time in more than 30 years.
“What I’m hearing is that the budgets that have been put into place, in other words, company budgets over the last two years, have actually . . . been budgeting parity,” said Pyle of discussions he has had with various Canadian companies.
“So from that point of view, this may not have that much of an impact on earnings. I remember back in ’07 talking to local manufacturers around here and it was like, oh my god I don’t know what I’m going to do. Now, it’s OK, no big deal.”