Low Expectations for 3Q Earnings Season

Third-quarter corporate earnings season kicks off this week, beginningwith industrial bellwether Alcoa reporting tomorrow and then major banks JP Morgan and Wells Fargo reporting on Friday.  Earnings expectations have come down significantly in recent weeks as companies have pre-announced earnings expectations below analyst estimates.  To date, there have been 89 negative pre-announcements versus 19 positive, creating a 4.7 times ratio that is the highest negative skew on record.  Third-quarter earnings growth for the S&P 500 is expected to be only 3%.  Reasons for the tepid expectations include low economic growth rates worldwide and subdued financial market activity.  Low fundamental earnings growth will likely cause companies to find more and more creative ways to grow the bottom line.  Share buybacks and increased leverage are two popular methods, and while they may appease equity investors, we as bondholders will screen leverage ratios closely to assure our corporate bond investments perform well.