It’s earnings purgatory season. Leading into earnings season, analysts typically do very little as they await company guidance. However, this earnings season is shaping up differently. Point 1: Earnings are expected to be up for the third quarter, but the extraordinary profits of oil companies are distorting the results. Without energy, earnings are negative. Q3 earnings Ests: S & P 500 All sectors: up 4.1% Excluding Energy: down 2.6% Source: Refinitiv Point 2: The companies that have reported early have generally been disappointing. Of 20 companies reporting so far, fewer are beating estimates, and the beat percentages are much smaller. Some believe the long-awaited earnings “recession” will occur in the fourth quarter, others say 2023. Fewer companies are beating estimates “and by a lesser amount… growth is slowing rapidly and there are an increased number of negative EPS estimate revisions relative to last quarter and what we have become accustomed to over the past several years,” Nick Raich from Earnings Scout said in a recent note to clients. Most notable are the number of companies that have either missed or guided down for the rest of the year, including FedEx, Nike, CarMax and Micron. Of the 20 companies in the S & P 500 that have reported earnings to date for the third quarter so far, 65.0% have reported earnings above analyst estimates, according to Refinitiv. This is well below the average of 78.1% for the prior four quarters. Point 3: Overall earnings for the S & P are still expected to be up in Q3 and Q4, but several sectors have seen significant cuts in the past few weeks. Traders are focused on fourth quarter estimates, where four sectors are already negative, and technology is just barely positive. S & P 500 Q4 earnings: Key sectors going negative Communication Services: down 9.5% Financials down 2.9% Consumer Discretionary down 2.3% Materials down 2.1% Technology up 0.2% Source: Refinitiv Raich said the uncertainty level around earnings is exceptionally high. “A lot of CEOs have ‘deer in the headlight’ looks,” Raich told me. “They don’t know how to forecast how rising interest rates are going to impact demand. A lot of executives have never lived in a period of rising interest rates and don’t know how to forecast it.” Raich is still expecting overall earnings to be positive for the third quarter, but he says Q4 will “be close.” He expects Q1 of 2023 to be “flat at best” and Q2 of 2022 will likely see negative overall growth. While he is certain that earnings will likely go flat to slightly negative, it is the degree that is still very unclear and which accounts for the very wide degree of uncertainty around both the earnings direction (up 4%? flat? down?) and the market multiple (13? 15? 17?). “It’s getting to reality now, but it has more to go,” Raich said.