The third quarter earnings reporting period may have officially started with Alcoa's (AA) report on October 9, but things really got rolling in the week just concluded with approximately 80 S&P 500 companies reporting their results for the September quarter. 

In sum, the third quarter results are nothing to write home about (sorry, mom), so we have penned a six-pack of some brief thoughts here instead.

Brief Thought #1:  Financials Are Shining

In spite of depressed net interest margins, the vast majority of financial companies reporting exceeded their consensus earnings estimates.   The results, however, were anything but straightforward. 

Debt valuation adjustments, litigation expenses, asset sales, and the release of loan loss reserves made for a convoluted read of the earnings reports and stretched one's ability to make an apples-to-apples comparison.

Market participants nonetheless appeared to adhere to the qualitative aspect of what they heard from the financials, particularly the banks which highlighted improved credit quality trends, strong mortgage demand, and a pickup, albeit modest, in lending activity.

If one area had to be labeled a bright spot so far this reporting season, it would be the financial sector, although it is more like a night light than a stadium light. 

Since JPMorgan Chase (JPM) reported its results on October 12, the Financial Select Sector SPDR (XLF) has risen 0.5% versus the S&P 500, which is basically flat.

Brief Thought #2: If Not a Wreck, Tech Is Certainly a Fender Bender

The technology sector always joins with the financial sector to set the tone for the broader market in the early part of the reporting period.  For many quarters now, the tech sector has been among the brightest of earnings spots.  Not the case this reporting period.

The tech sector this time around has been a sore spot because of some high-profile misses and a general message of weak demand that is showing up in top-line numbers.

Google (GOOG), Microsoft (MSFT), IBM (IBM) and Intel (INTC) were the standard bearers of disappointment in the week just concluded.

Google fell short of the Capital IQ consensus estimate by $1.63.  Microsoft reported an 8% decline in its fiscal first quarter revenue. IBM saw revenues fall 5.4% and surprised many by not raising its full-year guidance. Intel's operating income was flat and it warned that gross margins would take a hit in the fourth quarter due in large part to excess capacity (stemming from weak demand).

Apple (AAPL) hasn't reported yet, but investors are clearly concerned about its ability to keep meeting the loftiest of expectations.  In the last month, shares of AAPL have fallen 13%.

It isn't all bad in the tech sector.  Blended earnings growth is still projected to be up 1.0%.  However, that is down from 2.3% growth expected two weeks ago and that won't get it done for a sector widely-owned for being a growth sector.

Brief Thought #3: Industrials Showing Lack of Industrial-Strength Earnings

The industrial sector is a real source of earnings concern.  Prior to the rush of this reporting period, companies such as FedEx (FDX), Caterpillar (CAT) and Cummins (CMI) tempered expectations regarding the demand outlook.

In the week just concluded, Dover (DOV), Danaher (DHR), Parker-Hannifin (PH), Honeywell (HON), Stanley Black & Decker (SWK), and Ingersoll-Rand (IR) all issued earnings and/or revenue warnings on top of their third quarter reports.

CSX Corp. (CSX) said its overall outlook for Q4 is neutral.  Industry peer Union Pacific (UNP) noted third quarter business volumes were down slightly compared to 2011 and that the fourth quarter will likely look a lot like the third quarter.

General Electric (GE), meanwhile, said it is still on track for double-digit earnings growth in FY12 but lowered its revenue growth forecast to 3% from 5%.  GE added on its conference call that it is not looking for 2013 to be better than 2012 and that it expects Europe to continue to be a headwind.

Brief Thought #4: Currency Deflating U.S. Multinational Results

In our third quarter earnings preview, we pointed out that the third quarter average for the Federal Reserve's nominal broad effective exchange rate index was 4.8% higher than the prior-year period, making it all but certain that the stronger dollar would act as a drag on the results for U.S. multinationals.

That drag has been plain to see in the early part of this reporting period.  The companies in the table below offer a representative snapshot of the currency effect.

  
Brief Thought #5: Guidance Is Guarded

Few companies are sounding resolutely upbeat about the near term.  That is not a surprise with all of the uncertainty around the globe and the weak top-line growth.  Third quarter revenues are on pace to decline 0.2% while fourth quarter revenue is projected to be up just 3.0%. 

Unlike past reporting periods, there hasn't been a current of upbeat guidance across most, if not all, sectors.  On the contrary, there has been a current of downbeat guidance so far.  

A recent report from FactSet indicates that 22 companies have provided guidance for the fourth quarter and that only one of those companies has issued positive EPS guidance.

The warnings have been led by the technology (6), consumer discretionary (6), industrials (4), and health care (3) sectors.

Still, the fourth quarter consensus earnings growth estimate has only been shaved slightly to 9.7% from 9.9% on October 1.  We still see added risk of further downward revisions.

Brief Thought #6: The Fundamental Divide Persists

Notwithstanding the lackluster earnings results and weak guidance, the equity market is holding up quite well.  Since Alcoa's report, the S&P 500 is down only 0.6% -- and that is with a 1.7% decline on October 19.

The constant factor of course is that central banks have not pulled their policy support.  That understanding continues to provide a floor of support for equity prices with the earnings ceiling starting to sag.

Cummins (CMI) is a good example of this fundamental divide -- or the Fed put if you will.

After the close on October 9, Cummins warned that its FY12 revenue would be approximately $17 bln versus prior guidance of $18 bln and $18.05 bln for FY11.  The current consensus EPS estimate for Cummins, as compiled by S&P Capital IQ is $8.75, or 3.5% below FY11.

Shares of CMI, however, are currently trading at $91.93 or 1.2% higher than where they were trading at the time of its revenue warning.

What It All Means

The financial sector has carried the load, as expected, and has driven a positive revision in the overall third quarter growth rate from -2.4% on October 8 to -1.8% today, according to Thomson Reuters.  Still, we are not impressed with the reporting period so far.

Revenues are forecast to decline 0.2%, making it apparent that cost-cutting continues to be a driving factor behind earnings growth -- where there is earnings growth.

There are still a lot companies that are going to report their results for the September quarter.  We are only about 20% to completion.

Nonetheless, the third quarter earnings reporting period so far has left plenty to be desired.  The weak and cautious-sounding guidance for the fourth quarter is simply adding to the fundamental divide between real economic activity and the alternate reality of policy-supported trading activity. 

  --Patrick J. O'Hare, Briefing.com