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Earnings season is here, but are revenue estimates too high?

A Honeywell Aerospace T55 engine at the Seoul International Aerospace & Defense Exhibition in Goyang, South Korea.
SeongJoon Cho | Bloomberg | Getty Images
A Honeywell Aerospace T55 engine at the Seoul International Aerospace & Defense Exhibition in Goyang, South Korea.

Earnings season is upon us — but some are concerned estimates may be too high. The stakes this quarter are unusually high. The earnings recession is supposed to end this quarter, reversing five straight quarters of earnings decline.

Improvements in top-line growth, revenues, are supposed to bring that boost. Revenues are expected to increase 2.5 percent, according to Thomson Reuters. That would be the first increase in revenues in the last six quarters.

But in the last two trading sessions, three large global industrials have lowered earnings and revenue estimates for the full year: Dover, Honeywell, and PPG.

Dover was the latest to warn this morning. The company is big in commercial refrigeration, oil drilling and production, as well as pumping systems. Its commentary echoed Honeywell's on Friday. It expects the global economy to remain soft with oil and gas weakness and some incidental margin pressure in food and refrigeration.

Ugh. The problem for all global industrials — those that sell across a lot of industries, in a lot of countries, is twofold. They face low global growth, and weak end-market demand, particularly in mining, oil and gas and agriculture.

Now, we all know that the oil business is still weak. But Honeywell is big in aerospace and defense. That, until recently, was a bright spot. That is worrisome.

Wall Street seems split on how seriously to take these warnings.

The good news is that industrials were already expected to have a negative effect on third-quarter earnings.

S&P 500: Q3 Earnings Estimates

Materials: up 7 percent

Health Care: up 5.5 percent

Technology: up 4.5 percent

Consumer Staples: up 4.2 percent

Industrials: down 1.3 percent

Source: Thomson Reuters

So far, 13 industrials have issued guidance, and 11 (85 percent) of them have been negative, according to FactSet. That is above the 5-year average of 73 percent negative.

Citigroup downgraded United Technologies this morning, saying that the consensus estimates are too high and that "it's going to be tough sledding for a while" because it does not see much growth next year.

But outside of industrials, analysts do not seem very worried. Overall, there is less negative guidance this quarter than usual.

But we all know analysts have to be dragged kicking and screaming before they change their numbers.

Instead, look at what the strategists are saying. They take what analysts are saying and then overlay a global macroeconomic perspective on top of that commentary.

This morning, David Kostin at Goldman Sachs said he expected disappointing third-quarter results.

"We see a weak 3Q reporting season coupled with negative 4Q EPS revisions pushing stocks 2 percent lower to our year-end target of 2,100," he said.

What's the problem? While Kostin expects slightly lower oil to be a positive for third-quarter earnings, the negatives include slower growth, higher interest rates, and a slightly stronger dollar.

There's that slower global growth problem.

But if you look at the stock market, the worry isn't there. Why not? The Street still believes that big earnings gains from technology, health care and even consumer staples will carry the day. Oh sure, a few of those boring industrials can't make the cut, but hey, the rest of the market will take up the slack. We will still have positive earnings growth for the third quarter.

Hopefully.

So, that's the story. Ignore the warning signs, emphasize the positives. That's why we're still in a bull market. No matter what you might hear about negative sentiment, the market is still very much in "I believe!" mode.

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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