The next few trading sessions are unlikely to be much different from the last few, despite the release later this week of the August Durable Goods and Personal Income & Spending reports. We do have top-tier economic data on deck for release next week, particularly the September non-farm payroll report and the manufacturing ISM report. But my sense is that the market will wait for the third quarter reporting season before making a decisive directional move.
Third quarter earnings are expected to be down 3.4% from the same period last year, with half of the 16 Zacks sectors expected to have negative year-over-year earnings comparisons. Should actual results meet these expectations, we will get the first quarterly earnings decline since the start of the earnings recovery in 2009. But I don't expect the earnings decline in Q3 to trigger a market sell-off.
What could change the market mood, however, is guidance for the following quarters, particularly the fourth quarter. This is critical as current expectations are for a notable turnaround in earnings growth in the fourth quarter, with total earnings for the S&P 500 expected to be up in excess of 7%. Given the overall negative tone of recent pre-announcements from FedEx (FDX), Intel (INTC) and from Caterpillar (CAT) today, those fourth quarter growth expectations may be a bit too optimistic. It may be difficult for the market to sustain recent gains while corporate profitability is eroding.