It looks like this earnings season is going to be very disappointing

Before earnings season, analysts usually don't do much as they wait for company guidance. This earnings season looks different.

Early signs show that the next earnings season will be very disappointing.

Analysts don't do much while they wait for the company's guidance before earnings season. This earnings season, though, is shaping up to be different.

Point 1: Earnings are expected to go up in the third quarter, but the huge profits of oil companies are making the numbers look different. Without energy, you can't make money.

S&P 500 earnings forecast for the third quarter

4.1% growth across the board
Besides energy, it's down 2.6%.
from Refinitiv.

Point 2: Most of the early reports from companies have been disappointing. So far, only a few of the 20 companies that have reported are beating estimates, and the percentages of those that are are much smaller. Some people think the long-awaited "recession" in earnings will happen in the fourth quarter, while others say it will happen in 2023.

In a recent note to clients, Nick Raich from Earnings Scout said, "Fewer companies are beating estimates, and by smaller amounts. "Growth is slowing quickly, and there are more negative EPS estimate revisions compared to last quarter and what we've been used to over the past few years."

The most interesting statistic is the number of companies, like FedEx, Nike, CarMax, and Micron, that have either missed their goals or said they will do worse for the rest of the year.

Refinitiv says that, of the 20 S&P 500 companies that have reported earnings so far for the third quarter, 65.0% have reported earnings above what analysts expected. This is much lower than the average of 78.1% for the last four quarters.

Point 3: Earnings for the S&P are still expected to go up in Q3 and Q4, but in the past few weeks, there have been big drops in a number of sectors. Traders are paying attention to estimates for the fourth quarter, where four sectors are already in the red and technology is just about in the black.

Earnings for the Q4 of the S&P 500: Key sectors are going down.

Communication services are down 9.5%.
The financials went down 2.9%.
Consumer Preference
Materials are down 2.1%.
Technology went up 0.2%.
Source: Refinitiv

Raich said that there is a very high level of uncertainty about earnings,. "A lot of CEOs have that 'deer in the headlight' look." "They don't know how to predict what will happen to demand when interest rates go up. A lot of CEOs have never lived through a time when interest rates went up, so they don't know how to predict it.

Raich still thinks that the third quarter will be profitable overall, but he says that the fourth quarter will "be close." He thinks that Q1 of 2023 will be "flat at best," and that Q2 of 2022 will probably have negative growth overall.

He is sure that earnings will probably stay the same or go slightly down, but he doesn't know by how much. This is why both the direction of earnings (up 4%, flat, or down?) and the market multiple (13, 15, or 17) are still very uncertain.

Raich said, "It's getting closer to being true, but there's still more to do."