With macroeconomic concerns putting pressure on profit margins, Wall Street is preparing for a challenging earnings season. The third-quarter earnings season has just begun and the results across the industries will be closely watched by investors and analysts. A stronger dollar, bloated inventory levels, and uncertainty over the Federal Reserve’s rate-hiking cycle are expected to leave the balance sheet of companies in a disarray. While that may have been discounted by the market, to an extent, the management commentary on the future outlook may guide the next leg of the market rally on either side.

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John Butters is Vice President and Senior Earnings Analyst at FactSet has a take on the earnings so far announced by the S&P 500 companies. Here is what Butters has to say:

The start of the third quarter earnings season for the S&P 500 has been weaker than normal, as the number and magnitude of positive earnings and revenue surprises have been smaller than recent averages. In addition, analysts have continued to lower earnings estimates for companies since the end of the quarter. As a result, the earnings and revenue growth rates for the S&P 500 for the third quarter are lower today compared to September 30.

Overall, 7% of the companies in the S&P 500 have reported actual results for Q3 2022 to date. Of these companies, 69% have reported actual EPS above estimates, which is below the 5-year average of 77%. In aggregate, companies are reporting earnings that are 0.1% above estimates, which is well below the 5-year average of 8.7%.

As a result, the index is reporting lower earnings for the third quarter today relative to the end of last week and relative to the end of the quarter.

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The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the third quarter is 1.6% today, compared to an earnings growth rate of 2.2% last week and an earnings growth rate of 2.8% at the end of the third quarter (September 30).

Downward revisions to earnings estimates for companies in the Financials sector and negative earnings surprises reported by companies in the Financials sector have been substantial contributors to the decline in the overall earnings growth rate for the index since last Friday and since September 30.

As a result, the index is reporting flat revenues relative to last week and lower revenues relative to the end of the quarter. The blended revenue growth rate for the third quarter is 8.5% today, compared to a revenue growth rate of 8.5% last week and a revenue growth rate of 8.7% at the end of the third quarter (September 30). Downward revisions to revenue estimates for companies in the Energy sector have been a substantial contributor to the decline in the overall revenue growth rate for the index since last Friday and since September 30.

The forward 12-month P/E ratio is 15.5, which is below the 5-year average (18.5) and below the 10-year average (17.1). However, it is above the forward P/E ratio of 15.2 recorded at the end of the third quarter (September 30), as the price of the index has increased while the forward 12-month EPS estimate has decreased slightly since September 30.

This week, 66 S&P 500 companies (including eight Dow 30 components) are scheduled to report results for the third quarter.