Do Alcoa Earnings Really Set the Tone for Stocks?

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Alcoa, which kicks off the third-quarter earnings season on Tuesday, is often considered a bellwether stock. But do the quarterly results from the Dow 30 component actually set the tone for the markets?

The current earnings estimate for the aluminum giant is one cent a share, which would represent a 93 percent decline from a year ago, when when Alcoa reported a profit 15 cents a share.

So how has the market done when Alcoa beats or misses by one percent or more?

In the last 12 years, when the company beat third-quarter estimates by more than one percent, the Dow finished the fourth quarter positive 100 percent of the time, with an average gain of 7 percent.

But when Alcoa missed estimates by one percent or more, the Dow ended the fourth-quarter positive 55 percent of the time, with an average gain of 2.5 percent.

Keep in mind that since 2000, Alcoa beat third quarter estimates by more than one percent in only 4 instances (the last time was 2010, when it reported actual earnings of nine cents per share compared to a consensus estimate of five cents.

While the Dow is up over 11 percent year-to-date, Alcoa has lagged the index by about 6 percent.

One of the reasons for the underperformance relates to a downtrend in aluminum prices, which fell to a two-year low back in August of this year (since then, they have rebounded to a 6-month high).