Stocks got slammed Friday by worse-than-expected quarterly results, but the damage may be limited because Wall Street was already expecting a nasty earnings season.
The current estimates—as well as actual reports—now anticipate a 1.8 percent profit decline among the S&P 500 companies for the third quarter, the first decline since 2009.
The big surprise so far has been the extent of the earnings hits felt by the technology sector, with its international exposure and the slowdown in PC sales.
Sixty percent of the S&P companies that had reported as of Thursday saw earnings per share above estimates, Thomson Reuters says. But that is below the typical 62 percent and below the recent average of 67 percent.
Even more of a concern is that a substantial number of companies have bombed on revenues, with top line misses an unusually high 58.6 percent, above the recent trend of 45 percent and 10-year trend of 38 percent, according to Thomson Reuters.
"I still feel like it's telling us what we already know," said Thomas Lee, chief U.S. equity strategist at J.P. Morgan. "Earnings stink because the global economy slowed down. Europe is in recession, and China slowed down."
Stocks earlier this week flirted with 2012 highs, even as a number of major companies saw earnings or revenues—or both—fall short of estimates. But the tide turned Thursday as stocks traded slightly lower while investors digested Google's big earnings shortfall and its shares weighed on indexes.
By Friday, however, a series of blue chips led the market lower, with misses by Dow stocks Microsoft, General Electric and McDonald's smacking their stocks and taking the Dow sharply lower. GE is the minority shareholder of NBCUniversal. (Read More: Track Earnings Here)
But strategists make a case that some of these stumbles are already in the price of stocks.
"We surveyed clients two weeks ago," said Tobias Levkovich, chief U.S. equity strategist at Citigroup. "Eighty percent told us earnings estimates are too high."
Going into the earnings season, analysts had expected the companies that had exposure to foreign currencies, China and Europe to be the most likely to misstep. The domestically oriented companies, the theory went, would be less inclined to miss because of a slightly stronger U.S. economy and an increasing willingness by American consumers to spend.
But McDonald's profit pain also came from the U.S. The global fast food chain's earnings fell about four percent, due to the stronger dollar's impact on international result but also "broad competitive activity" in the U.S.
McDonald's revenue in the U.S. in stores open 13 months grew by 1.2 percent while globally, restaurant revenue rose 1.9 percent, the slowest pace since 2003.
"I think the U.S. surprised the most on same store sales, as well as on the margin front," said Lazard Capital Markets restaurant analyst Matthew DiFrisco on CNBC's "Squawk on the Street." "I think that's what's weighing on the shares."
The earnings performance of financials, health care and staples has been the best.
"We started off strong, as the financials generally had a really good earning season," said Bill Stone, chief investment strategist at PNC Wealth Management. "The staples look like they've done well but again we're early in the season." According to Thomson Reuters, financial companies beat earnings estimates 72 percent of the time this quarter, while consumer staples beat 70 percent.
But on a revenue basis, 82 percent of health care companies had negative surprises, while 83 percent of industrial companies had misses, and 67 percent of materials companies' revenues came up short, according to the Thomson Reuters data.
"The revenue line has been the place where things are more challenged," said PNC's Stone. "That's what most people expected. The global economy was soft. Companies have been doing a pretty good job managing that. When you get a soft top line you're going to get more misses."
One of the laggards in terms of positive surprises has so far been technology.
"It's definitely worse," said J.P. Morgan's Lee. "People were caught by surprise. They always look at sequential growth, so when sequential momentum is down, it's bad."
Technology stocks beat 44 percent of the time and missed 33 percent of the time, according to Thomson Reuters. Revenues were below expectations at 56 percent of the companies that reported.
The misses by tech companies have been across the board, both impacting Internet names like Google, which is trying to maximize mobile revenues, and companies that rely on PC sales, like Microsoft and Advanced Micro Devices . This puts the pressure on tech favorite, Apple, which reports earnings Thursday and is positioned in mobile, tablets and PCs.
Tech sector earnings growth, both from actual reports and expected ones, has stalled to a paltry one percent for the third quarter, way down from the double digit growth expected just a couple months ago, according to Thomson Reuters.
Lee said Microsoft's next version of windows, expected this quarter, could help drive some of a new upgrade cycle.
For now, he said corporate buyers in the U.S. appear to be holding back because of concerns about the so-called "fiscal cliff." The cliff would be the economic impact of the expiration of Bush tax cuts Jan. 1, and automatic spending cuts if Congress does not reverse them in the lame duck session after the election. (Read More: Budget Cuts Loom and Main Street Shudders)
"I think there are real good reasons why earnings should be troughing right now. We know the global data's been really, really sluggish, and so that's the reason why industrial and tech earnings are as weak as they are," Lee said. "I don't think that means that's what tech earnings will look like two quarters from now."
Stocks that have missed by five percent or less have seen their stocks turn higher, a sign that earnings misses are "baked in," Lee said. Of 72 companies that reported, those missing by five percent or less have seen their shares outperform the S&P, Lee noted. That is contrary to historical trends and suggests the bad news is already in the stocks.
"What we've seen is some of these high quality names end up being bought on the dips, the pullbacks," he said. Lee noted that many money managers are underperforming and they are pressed to match the benchmarks before the end of the year. The S&P 500 is up about 14 percent year-to-date.
The energy sector has yet to report, and analysts had expected the biggest decline in that group's earnings. Analysts are looking for the areas with biggest expected earnings declines and revisions, as potential sectors for upside surprises.
"Earnings estimates for the third quarter have been coming down pretty much all year. For the second quarter it was a tough market, but it's been a good market as a whole," said Stone, who also sees a possible trough in the third or fourth quarter.
"Fourth quarter seems to be firming up for the global economy," he said.
Lee said companies are rightly cautious but that the slowdown in profit growth appears temporary. "I would have to give them credit, which means profits are not going to get smashed, like you would worry about if they were tripping over their skis. You're not giving up demand. It's just deferred demand," he said.
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