Profits look to avoid quarterly contraction

Fears of a so-called “earnings recession” are still alive on Wall Street, but with profits coming in better than expected there’s still a small chance third-quarter profits will eke out a positive gain.

At midday Wednesday, 451 of the 500 companies in the Standard & Poor’s 500 stock index had reported earnings. The earnings growth rate shows a contraction of -0.9%, which is better than the -4.2% growth forecast by analysts on Oct. 1 and close to the -0.3% contraction estimated on July 1, according to Thomson Reuters I/B/E/S.

Earnings have been clipped by a 57% contraction in the hard-hit energy patch, due to the big downdraft in oil prices. Profits also have been dinged by an economic slowdown in China and a strengthening dollar, which hurts sales and profitability of big U.S. companies that do a lot of business abroad.

It’s not uncommon for actual quarterly earnings to come in 3, 4 or even 5 percentage points stronger than initial analyst estimates. S&P 500 companies eked out quarterly profit gains in the first two quarters of 2015 despite negative growth forecasts heading into the earnings season.

If earnings can turn positive it would mark a big psychological boost for investors, as quarterly profits have not suffered a contraction since 2009 at the height of the financial crisis. Indeed, another positive quarter would quiet talk of a profits recession.

But if profits finish the third quarter with negative growth, it will make the chatter about earnings weakness grow even louder, especially at a time when stock valuations are higher than average and the Federal Reserve is getting set to hike interest rates for the first time in nearly a decade.