Disappointing Business Results of American Companies Crash Stock Prices on Wall Street

The season for the release of business results of American companies for the third quarter began on Tuesday with Alcoa’s report, which disappointed investors, causing stock prices on Wall Street to fall by more than 1 percent. Investors are hoping that the earnings of companies in the S&P 500 index, the most important stock index on Wall Street, could be higher in the third quarter than in the same quarter last year, which would mark their first increase after four consecutive quarters of decline.

However, the initial reports are not encouraging. Alcoa’s stock price plummeted by more than 11 percent after the largest American aluminum producer reported revenues and earnings that were lower than expected.

Indeed, Alcoa’s net income rose in the third quarter to $166 million, up from $44 million in the same quarter last year, but this is less than analysts had estimated. The company’s revenues also fell short, amounting to $5.2 billion, down from last year’s $5.6 billion.

Even more, Illumina’s stock price dropped nearly 25 percent as the estimates for the results of this pharmaceutical company were weaker than analysts’ expectations.

The first disappointing reports have raised “fears among some investors that earnings growth will not be sufficient in circumstances where an increase in interest rates by the American central bank is almost inevitable,” says Rick Meckler, president of LibertyView Capital Management.

In a Reuters survey, analysts estimate that in the past quarter, earnings of companies in the S&P 500 index fell by 0.7 percent compared to the same period last year, which would mean that the earnings recession continues, as analysts refer to the decline in company profits for at least two consecutive quarters on a year-over-year basis.

However, companies usually exceed analysts’ expectations by a few percentage points, so by the end of the earnings season, it could turn out that profits have finally increased for the first time in a year.

Focusing on Energy Companies and Banks

The slowdown in global economic growth, primarily in China, low oil and commodity prices, and a strong dollar are the main causes of the weakness in revenues and earnings of American companies.

All of this has pressured company earnings over the past year, and the only difference is that oil prices have recovered in the meantime.

Due to weak demand worldwide and high production, at the beginning of the year, barrel prices fell deep below $30, to the lowest levels in 13 years.

However, since then, thanks to investors’ hopes that the gap between supply and demand will gradually narrow, they have recovered, so in the third quarter, the average price of ‘black gold’ was around $45 per barrel, not far from the same period last year.

Therefore, there is great anticipation to see whether business reports will show that revenues and earnings of companies in the mining and energy sectors are stabilizing.

Investors will also focus on bank earnings as the environment of record-low interest rates and the slowdown in global economic growth does not favor them.

This week, business reports will be released by some of the largest American banks – JPMorgan Chase, Citigroup, and Wells Fargo.

The high dollar exchange rate will also impact the operations of American companies, given that companies in the S&P 500 index generate nearly half of their sales abroad.

Driven by expectations that the American central bank could raise key interest rates by the end of the year, the dollar index, which shows the value of the dollar against six major world currencies, reached its highest level in eight months yesterday.

And the strengthening of the dollar negatively affects American multinational companies as it makes their products less price-competitive in foreign markets.

Nevertheless, analysts in a Reuters survey estimate that the revenues of all companies in the S&P 500 index in the past quarter increased by 2.5 percent compared to the same period last year. If these estimates are realized, it would be the first increase in their revenues since the end of 2014.