The favorable news is that revenue gains for the aluminum giant— and the Standard & Poor's 500-stock index broadly—are expected to look good. Indeed, analysts polled by Thomson Reuters expect Alcoa's revenue to expand nearly 22% year on year to about $6.3 billion. As for the broader market, FactSet notes revenue is expected to rise about 10.1% from a year earlier. That would mark the first double-digit gain since early 2010.
But costs are up sharply, too. That could slow earnings growth. For instance, J.P. Morgan recently lowered its full-year earnings estimate for Alcoa to $1.35 a share from $1.55, largely on cost concerns. It also reduced its estimate of Alcoa's second-quarter earnings by six cents to 32 cents a share, although that would still be up markedly from last year's 13 cents. Any benefit from higher alumina prices and production during the quarter is likely to be "offset by higher raw material costs, particularly fuel oil, caustic soda, and coke and pitch," it said.
The pressure for companies to increase earnings in this environment may be one reason hiring remains lackluster. That is especially the case because labor is typically the single biggest cost for American companies. As Friday's jobs report showed, the unemployment rate rose to 9.2% in June from 8.8% in March, and the U.S. added only about 87,000 jobs per month, on average, during the quarter.
For that reason, the key word to listen for this earnings season is "transitory." Reassurance from companies like Alcoa that second-quarter cost pressures are abating and that demand remains firm will support the view of those expecting the economy—and hiring—to bounce back in coming months.
Still, it matters what companies actually do, not just what they say. Profit margins at S&P 500 component firms are currently forecast to hit 10% in early 2012, from an estimated 9.5% in the second quarter, according to FactSet. If companies seem to be falling short of those targets, more pain for labor—and stock—markets may lie ahead. For the latest updates PRESS CTR + D or visit Stock Market news Today
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