Q3 earnings may be disappointing

Shortly after Tuesday's close, aluminum giant Alcoa (AA) will report its third-quarter results and kick off what is supposed to be a weak third-quarter earnings season.

Investors will hear a lot from big multinationals like Alcoa, Caterpillar (CAT), Boeing (BA), 3M (MMM), United Technologies (UTX) about how business has been affected by slowing economies in Europe, Japan and China.

Later on, in early November, when retailers start to report, the focus will shift to domestic consumer confidence, with analysts and investors pondering the prospects for this year's holiday shopping season.

When all is reported, at least for Standard & Poor's 500 companies, earnings will have fallen 2.4% from the third quarter of 2011, the first decline since the economic recovery began in late 2009, according to Thomson Reuters. If earnings warnings to date are any indication, the decline may be worse.

The earnings may well weigh on a stock market that has had a splendid 2012, although stocks have been mostly lower today.

As of Friday, the Dow Jones industrials ($INDU) were up 11.4% for the year after Friday saw the index close above 13,600 for the first time since December 2007. The Standard & Poor's 500 Index ($INX) was up 16.2%, while the Nasdaq Composite Index ($COMPX) was up 20.4%. (Stocks opened lower on Monday.)

Article continues below.But the market has been struggling to move beyond current levels. The Dow's close above 13,600 came after repeated assaults, and it is lower Monday.

Meanwhile, there are headwinds galore facing investors: Europe, the election and the fiscal cliff and the tricky Chinese economy. The Chinese economy is growing -- but not as fast as before. The big question is what "not as fast as before" actually means.

• Check the MSN Money earnings calendar

Plus, there is the risk that some shooting involving Israel and Iran may erupt. Syria started firing into Turkey last week, raising the risk that something more broadly bad may erupt in the Middle East.

Some companies, like Ford Motor (F) and General Motors (GM), have acknowledged that their European businesses are suffering very large losses because the debt crisis and economic woes in, say, Italy, Spain, Greece and even France are clobbering sales.

A few analysts have suggested that Ford and GM just shutter their European operations -- not so easy a task under European labor laws.

Others like Hewlett-Packard (HPQ) are struggling to just to get stabilized. HP has struggled through  multiple CEOS over the last decade and a paradigm shift in technology that currently prizes the device -- tablet or telephonic -- over the personal computer.

Thomson Reuters believes a weak earning season is ahead because of preponderance of warnings of shortfalls over higher guidance.

Some 91 companies have issued earnings warnings; only 21 have raised estimates. The 4.3-to-1 ratio is the worst since the first quarter of 2001. That counts because, Thomson says, preannouncements do track closely with final results.

In addition, 25 S&P 500 have reported third-quarter results already. While 52% have beaten estimates, that's the lower than the long-term average of 63% and the 67% average over the last four quarters.

Many will blame the desultory results on a higher dollar, which impacted second-quarter results for many companies. But the dollar has moved lower against a number of currencies, especially the euro, since the end of July. A lower dollar will increase the value of profits earned outside the United States.

If you look just at the ten sectors of the S&P 500, about half are expected to see earnings break even or show gains, with consumer discretionary stocks the best performers, followed by financial companies, industrial and technology companies.

Gains in the consumer discretionary sector will be driven by homebuilders and home-furnishing companies, which have been rising  sharply as evidence continues to suggest a modest recovery in housing has begun.

PulteGroup (PHM) is up 163% this year, tops among S&P 500 stocks. Lennar (LEN) is the S&P 500's fifth-best performer, up 93%. Sherwin-Williams (SHW) has gained 74.4%. Whirlpool (WHR), up 80.4%, is eighth among S&P 500 stocks for the year.

Financial stocks will be the second-best performing group, led by regional banks and real estate services.

The laggards will be materials and energy companies, which have seen commodity prices flatten or fall. The group is expected to see earnings fall 24%, Thomson Reuters says. Aluminum will be among the worst performers.

In addition to Alcoa, we're talking about U.S. Steel (X), coal-producer Alpha Natural Resources (ANR), down 68% this year, iron-ore producer Cliff's Natural Resources (CLF), down 38.5%, and fertilizer makers like Mosaic (MOS), which reported disappointing results last week.

Revenue will gains will be equally tough to come by. Thomson Reuters sees revenue for the entire S&P 500 basically flat from a year ago.

An 11.1% gain in utility revenue (thank this year's drought for the gain) and a 6.7% gain in revenue for the healthcare sector will be offset by a 17% decline for the energy sector. A big factor in energy will be slumping coal prices as utilities switch to cheap and cleaner-burning coal.

Oil and gas production revenue will fall 63%, with oil and gas refining and marketing revenue falling 14%. The declines are functions of lower prices, lower demand and a higher dollar for much of the quarter.

Technology revenue will be up 4.4%. What's not clear is what happens to the growth rate is you subtract Apple (AAPL) out. Apple reports fiscal-fourth-quarte​r results after the close on Oct. 25.  The consensus estimate is for a 28.7% revenue gain to $36.4 billion.