Market Preview: Consider Yourself Warned
Updated from 5:35 p.m. ET to include commentary from High Frequency Economics on the Tuesday's economic data and latest after-hours share prices .
NEW YORK ( TheStreet) -- Earnings season is finally here and it looks like the Federal Reserve -inspired momentum stocks have enjoyed of late is going to be tested.
According to the latest data from Thomson Reuters , analysts are expecting a 2.3% profit decline from the S&P 500 in the third quarter, down from 8.4% year-over-year growth in earnings in the second quarter. Back in July, the consensus was calling for a 3.1% improvement in the third quarter, so expectations were coming down even as the broad market rallied in the latter part of the summer in anticipation of QE3.
What's possibly more worrying is the level of warnings we've seen so far. To date, more than 20% of S&P 500 companies have pre-announced results and the vast majority of those have offered up negative outlooks. Out of 123 forecasts, 91 were warnings of shortfalls, while only 21 were giving a heads-up on better than expected results and 11 were in-line. The 4.3-to-1 ratio of negative to positive outlooks exceeds both last year's 2.7-to-1 figure and the 3.2-to-1 comparison in the second quarter.
Bank of America Merrill Lynch was fairly downbeat about the third quarter in its earnings preview, noting this will be the first year-over-year decline since the third quarter of 2009 when the United States was stuck in the thick of the financial crisis and that expectations still need to come down further.
"While guidance is not at extreme levels, we do expect trends to remain negative as 4Q expectations remain too high, in our view," the firm said. "Our cautious outlook on equities in the near term is based in part on continued downward revisions, in addition to risks surrounding the fiscal cliff and slowing global growth."
Stagnation on the top line is part of the problem this quarter, B of A said, as corporate America has generally trimmed expenses down to the bone and demand from Europe and China has slowed.
"With cost structures already lean, sales growth is increasingly important for companies' ability to grow earnings," the firm said. "Sales were flat last quarter, and this quarter analysts expect -2% YoY growth, or -1% ex. Financials. We expect the combination of lower commodity costs vs. a year ago, negative operating leverage and a deceleration in buybacks has caused Non-Financials EPS growth to decline more than sales growth."
Still, B of A said it doesn't believe the earnings situation will be disastrous for stocks and noted that the trend in guidance has actually stabilized over the past few months and is "nowhere near crisis levels" despite the worries prompted by warnings from bellwethers such as FedEx(FDX) and Intel(INTC) .