Earnings: Is this the trough? Much is being made that third-quarter year-over-year earnings for the S&P 500 index will be negative.
The answer, of course, depends on whether there will be any kind of expansion in 2013. It's pretty simple: An expansion would favor cyclicals (financials, materials, energy, industrials), while a contraction would favor defensive names (consumer staples, health care, utilities, telecom). (Read More: Cramer Previews Earnings Season.)
The current predominant "trade" is that the U.S. will continue to outperform, because the U.S. consumer is slowly improving, so the strength will be in autos, housing, and consumer staples. (Play Home Depot.) The risks are with stocks that have more international exposure, such as materials and energy. In other words, defensive.
But wait a minute. This trade has been around for a couple months already. Admittedly, it's been a choppy year, but in the last couple of months cyclicals have outperformed consumer stocks. You can argue that this is the specter of a third round of quantitative easing, but, regardless, bank stocks have have also been strong.
The idea that earnings are slowing are not new. Since June, earnings and the market have been negatively correlated ... earnings are being cut, but stocks are up.
What about the fourth quarter? Earnings are expected to be up about 10 percent. True, these estimates typically come down, but if historic norms hold they will only come down about 5 percentage points; that would still leave a 5 percent gain for the fourth quarter and a 3 percent to 4 percent gain for the entire year.
Not great, but still growing.
As for stocks, I have no doubt that October will be choppy, but a 20 percent correction? I doubt it. I can see a five percent correction and then buyers come in. People look willing to buy at lower levels. (Read More: Beware the Coming 25 Percent Correction: Pro.)
And remember, much will depend on Europe. If Spain goes smoothly and asks for help (the bailout fund, the European Stability Mechanism, is operational today) as expected, Europe will be less of an issue in October.
Green Dot slides 23.4 percent — set to open at a two-month low — after American Express said it’s moving forward with its
—By CNBC’s Bob Pisani; Follow Him on Twitter @BobPisani
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