Global growth worries have been a recurring theme in market discourse lately. But the focus of these worries was primarily on uncertainty about China and other emerging economies. Even the Fed cited these global growth challenges as a key reason for not announcing interest rate increases at the last FOMC meeting. While questions remained about the timing of the first interest rate increase, which a number of Fed officials indicated will arrive at the one of the two remaining meetings this year, there was no doubt about the state of the U.S. economy. In the consensus narrative, the U.S. economy stood as a pillar of strength and stability in an otherwise unsettled world.

That favorable narrative about the U.S. economy took a body blow with the September non-farm payroll report that shows the economy losing steam during the Summer months. Estimates for third quarter GDP growth have been steadily coming down lately, with the Atlanta Fed’s (almost) real-time measure of the economy currently pegging Q3 GDP growth at only +0.9% — and that was prior to the jobs disappointment.

It could all be just a temporary setback caused by inventory unwind (heavy inventory build in Q2 needs to be worked through in Q3) and weak trade numbers as a result of global weakness. But the fact is that we don’t know – we simply don’t know how enduring or otherwise this period of soft data will turn out to be. What is less uncertain is the fact that the Fed proved itself quite prescient in taking a pass on raising interest rates at the last meeting. The market’s Fed expectations have shifted materially following the weak jobs reading, with many now seeing the first rate increase sometime early next year.

The Fed and the state of the economy will remain the market’s primary preoccupation through the rest of this year, but this week’s start of the Q3 earning season will put a spotlight on the weak corporate earnings picture as well.

We know that the growth picture was quite bad in Q2, with total earnings for the S&P 500 index down -2.2% from the same period last year on -3.5% lower revenues. The Energy sector was the primary reason for the aggregate decline – the growth picture improves once the Energy sector is excluded from the aggregate numbers. Excluding Energy, total earnings for the S&P 500 index would have been up +5.1% in Q2 on +1.2% higher revenues.  

The growth picture isn’t expected to improve in Q3 either, with total earnings for the S&P 500 index expected to be down -5.6% from the same period last year on -5.5% lower revenues. The headwinds from Q2 are at play in Q3 as well, with a combination of Energy sector weakness, dollar strength and global growth uncertainties weighing on the outlook. Excluding the drag from the Energy sector (Energy sector earnings expected to be down -65.4% year over year), total earnings for the index would be up +1.6% on -0.5% lower revenues.

Including the Alcoa (AA – Analyst Report) report on Thursday, we will be seeing Q3 results from a total 24 companies, of which 5 are S&P 500 members. The chart below shows the weekly reporting calendar for companies in the S&P 500 index.