Investors Brace for Biggest Earnings Drop Since 2009

The estimated earnings decline for the S&P 500 in Q3 is 20.5%, according to analysts polled by FactSet. This would mark the second largest year-over-year decline in earnings reported by the index since Q2 2009 (-26.9%). Since today is a federal holiday in the U.S., third quarter earnings season will kick-off in earnest tomorrow. A total of 30 S&P 500 companies (6 are also Dow 30 components) will report this week including JPMorgan Chase, Johnson & Johnson, Delta Air Lines, United Airlines, Goldman Sachs, Bank of America and Morgan Stanley.

Predictions are understandably difficult to make this year, and just 69 companies have issued EPS guidance, well below the 5-year average of 104. There's a decent chance the third quarter dip won't be as terrible as forecast, similar to last quarter when a record 84% of companies reported positive EPS surprises. Keep in mind this followed record-high cuts to estimates so the bar was low.

On average over the past five years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 5.6%, so the actual earnings decline for the Q3 could be much smaller at around -17.6%. There's also been growing optimism around upcoming results as the recovery accelerated. Analysts usually reduce earnings estimates during a quarter, but this time they actually hiked estimates by 4.1% from the start of the quarter on June 30 to the end on September 30. The percentage of companies issuing positive EPS guidance is 67% (46 out of 69), which is above the 5-year average of 32%.