By now, investors should know the routine when it comes to earnings: Wall Street analysts start off expecting big things then gradually cut their views. Companies eclipse what can be a dramatically lowered bar, giving everyone encouragement that profits are still healthy.
The third quarter of 2015, though, is presenting a somewhat different scenario.
Expected to decline about 5 percent heading into the season, corporate earnings are struggling to get over even those low estimates. Sales are falling, dollar strength is weighing even more heavily than expected, and the look ahead to the fourth quarter is getting progressively worse.
Sure, some 68 percent of the 148 companies that have reported so far topped estimates.
But the beats have been small in many instances. With some of the biggest companies across the finish line, the quarter is still tracking at a 4.4 percent decline, according to S&P Capital IQ, dimming hopes that the index will beat estimates by the usual 3 or 4 percentage points. Quarterly revenue also has fallen, by 1.6 percent.
Companies representing 29 percent of the index's $17.8 trillion total market cap have reported through Thursday morning.
There have been some big-name earnings misses. Global economic bellwether Caterpillar, for instance, whiffed in its report Thursday, and energy as a sector has been only marginally better than the projected 65.8 percent decline forecast just three weeks ago.
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Remarkably, investors have not recoiled against the prospect of the first back-to-back earnings declines in six years.
The S&P 500 has gained about 3 percent since Alcoa reported earnings on Oct. 8, and the index is up nearly 7 percent for all of October. Even Caterpillar's miss, coupled with its reduced guidance, was met with buying as the company's shares jumped about 4.5 percent in afternoon trading.
Market behavior indicates a dismissal of bad news and instead hopes that the quarter will mark a low-water point for corporate profits.
"There will be more winners than losers, but I expect a lot of volatility this earnings season," said John Buckingham, chief investment officer at Al Frank Asset Management. "There's lots of opportunities nowadays for long-term investors to take advantage of some of the short-term dislocations."
Maybe so, but investors will have to sort through some detritus to find those opportunities.
As expected, energy has been by far the worst of the 10 S&P 500 sectors, generating an annualized earnings decline of 66.4 percent. Perhaps the biggest disappointment relative to expectations, however, has been the industrials sector, which has shown an 18.6 percent decline against Oct. 1 estimates of 12.3 percent. The consumer staples sector also is in the red, with a 2.3 percent drop, a bit better than the 3.4 percent decline expected at the beginning of the month.
In the bigger picture, the numbers show just how far corporate America has had to pull in the reins from its expectations that 2015 would be a breakout year in which both top-line revenue and bottom-line profit would accelerate.
On Jan. 1, analysts predicted the third quarter would grow 6.4 percent, 10 percentage points higher than the current reality. The fourth quarter was expected to show an 11.6 percent gain; thanks to downbeat revisions and reduced outlooks from CEOs, that number's been whittled all the way down to a 2.5 percent decline, which has soared since the Oct. 1 projection of a 0.4 percent slip.
Full-year profits were predicted to gain 7 percent over the 2014 comparables, with reality now a likely 1.1 percent loss. The downbeat momentum is not eating into projections for first-quarter 2016 earnings, which now are expected to show growth of 5.3 percent, down from Jan. 1 expectations of 11.6 percent.
If there's a bright spot, it's that Wall Street remains relatively sanguine about 2016, with full-year expectations at 9.1 percent. However, if current conditions hold up, such optimism will become harder to justify.
"It is reasonable to be skeptical of next year's optimistic looking expectations given how the 2015 estimates evaporated in front of our eyes over the last two quarters," Sheraz Mian, director of research at Zacks Investment Research, said in an analysis. "Maybe it will be different this time, but judging from what we have heard from management teams on the Q3 earnings calls in recent days, it is more than reasonable to be skeptical of these growth expectations for the outer periods."