Dark (but familiar) clouds float above earnings season

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Earnings season is upon us. That means a familiar pattern again emerges, even with Washington's debt fight thrown in the deck as a wild card.

It's early, but already we are hearing that third quarter earnings and fourth-quarter guidance will be a disappointment. We have heard this about the prior several quarters.

The pessimists are out saying Q3 and Q4 earnings are going to be a disaster. At first blush, early earnings reports do no look very promising:

Sens. McConnell & Reed haggle over debt limit extension

1) earnings misses from Yum! Brands and Costco (where September comparable store sales were also light).

2) While both Wells Fargo and JPMorgan beat on earnings, revenues were light. The beat in WFC's earnings was largely due to reserve releases, and revenue declines from mortgages were larger than expected.

3) Guidance was disappointing from Union Pacific, Citrix, Yum, Chevron, and today from Allegheny Technologies. So far, only Micronhas offered an optimistic near-term outlook.

4) We also had disappointing back to school September same store sales from Gap , Buckle and L Brands.

But it's early. Here's what we can expect if the historic pattern holds:

1) earnings for the companies in the S&P 500 will again hit an historic record in Q3, which started out high at 6 percent on July, have now come down to 2.9 percent, according to S&P Capital IQ. If the standard pattern holds, we will end up beating the estimate by 2 to 3 percentage points--so we will have 5 percent or so earnings growth year over year.

2) guidance for Q4 is characteristically high, at roughly 9.8 percent, but that will start coming down quickly.

The pattern that materializes is this: Companies report low earnings growth (roughly 1 percent quarter over quarter), and low sales growth. However, it is still growth.

The wildcard for Q4 is Washington. There is concern--which I think is legitimate--that companies will use the deadlock in Washington to lower estimates even more than usual. In the worst case scenario, we could end up with flat growth in Q4.

THAT would not go over well. That's why this week is crunch time. It's not two weeks into this; the shutdown will drag on growth if it goes on much longer.


1) I said on Friday that stocks would hold up as long as both sides in Washington's debt impasse were talking. On Friday we heard words like "constructive" and stocks were up. Yesterday and this morning, we are hearing words like "deadlocked" or "stalemate" and stocks are down.

Senate Majority Leader Reid and Minority Leader Mitch McConnell are trying to work out a deal that would open the government and raise the debt ceiling for several months, but there seems to be a deadlock over spending levels. Republicans want the additional sequester cuts that would kick in January 15th to come into effect; Democrats do not.

It's getting a little tricky now: The obvious compromise is for Senate to pass a bill that would open the government and raise the debt ceiling; the compromise would be to maintain current levels of spending in 2014. The problem is that they are then going to hand this to the Republican House, and it's not at all clear they will go along with it.

The longer the impasse goes on, the harder it will be for the Federal Reserve to figure out what the economy is doing. At least we will have the Beige Book this Wednesday.

2) Allegheny Technologies slides after announcing more restructuring and providing Q3 sales guidance below Wall Street expectations. ATI will close one operation and attempt to sell a second as part of its restructuring efforts. The metals producer sees Q3 sales of $970 million, versus analysts' $1.15 billion forecast.

Lower shipments, declining prices, and higher costs have all weighed on ATI's Q3 performance. "While we expect business conditions to remain challenging through the end of 2013, we continue to focus on taking actions to keep ATI strongly positioned," said CEO Rich Harshman.

By CNBC's Bob Pisani